Tag: Harvard (page 1 of 3)

A Plurality Of Voters Want Special Counsel To Investigate Clinton And Trump

Despite Jeff Sessions’ surprising insistence during his testimony before the House Judiciary Committee earlier this week that there’s “no factual basis” to appoint a special counsel to investigate actions by Clinton and former FBI Director James Comey, a plurality of voters believe special prosecutors should be investigating both the Clinton and Trump campaigns, according to a recent study that was shared with the Hill. 

The latest Harvard CAPS/Harris survey found that 44 percent of voters surveyed said a special counsel is needed to investigate both campaigns, meanwhile twenty-seven percent said only Trump needs to be investigated, while 21 percent said only Clinton needs to be investigated and nine percent said neither should be investigated.

The poll’s findings also showed that the number of voters who believe Special Counsel Mueller has found hard evidence of collusion is a paltry 38 percent, while 36 percent say there is no hard evidence yet and 27 percent saying they don’t know.

Unsurprisingly, the survey concluded that the public believes the Mueller investigation is hurting American democracy more than it is helping by implying that powerful, politically-connected Democrats who have the implicit support of the FBI and Deep State intelligence apparatus are immune to prosecution, while an outsider like Trump is not.

“The public thinks these investigations are hurting rather than helping our democracy but if there are going to be investigations, overwhelming majorities support investigating the Clintons – over two-thirds would investigate either both campaigns or just Hillary’s campaign,” said Harvard CAPS/Harris co-director Mark Penn.

Despite repeated calls from prominent Republican lawmakers to appoint a special counsel to investigate Comey and the Clintons, Sessions has so far been reluctant to do so, even after a letter leaked earlier this week revealed that the AG asked a team of prosecutors to look into it.

Several Congressional investigations were launched in September and October following reports that the Clinton campaign and DNC helped finance the infamous “Trump dossier” and that the FBI had failed to inform Congress about an investigation surrounding corruption related to the 2010 Uranium One deal – where then Secretary of State Clinton voted to approve a deal that ceded 20% of US uranium reserves to Russia’s state-owned nuclear agency.

Voters are suspicious of Clinton’s role in helping create the dossier, which the FBI used to help justify launching an investigation into possible collusion between the Trump campaign and the Russians that later morphed into the Mueller probe. Many of the claims in the dossier have not been verified, and there’s some evidence the FBI knew that at the time it launched the probe.

Sixty-six percent of voters say the dossier is less credible because of the Democrats’ involvement and 58 percent say it cannot be relied upon for information.

In addition, 65 percent of voters say there should be an investigation into the $145 million contribution the Clinton Foundation received from the owners of Uranium One, a Canadian firm that was sold to Russian investors when Hillary Clinton was secretary of State.

Meanwhile, voters are conflicted over Mueller. Thirty-three percent view him favorably, while 31 percent have an unfavorable view of him. A solid 54 percent say his professional relationship and friendship with Comey – believed to be a key witness in the probe – represents a conflict of interest.

“Mueller is seen as having a significant conflict of interest — one large enough to typically disqualify a special counsel," Penn said.
 

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Frontrunning: November 16

  • Senate Panel Approves Tax Plan as GOP Leaders Gird for Fight (BBG)
  • U.S. towns, cities fear taxpayer revolt if Republicans kill deduction (Reuters)
  • After House Victory, Tax-Overhaul Fight Now Goes to Senate (WSJ)
  • Analysts flee Wall Street with gallows humor as research changes loom (Reuters)
  • Tesla Unveils ‘World’s Fastest Production Car’ and Electric Big Rig (BBG)
  • Bitcoin Emerges as Crisis Currency in Hotspots (BBG)
  • Ivanka Trump and the fugitive from Panama (Reuters)
  • Murdoch Empire in Play as Suitors Line Up for 21st Century Fox Assets (WSJ)
  • Franken Case Puts Both Parties in Bind on Misconduct Response (BBG)
  • Crime Wave Engulfs Sweden as Fraud, Sexual Offenses Reach Record (BBG)
  • Google Has Picked an Answer for You—Too Bad It’s Often Wrong (WSJ)
  • Saudi Arabia swapping assets for freedom of some held in graft purge: sources (Reuters)
  • Metal recyclers prepare for electric car revolution (Reuters)
  • Despite Big Push From Beijing, Electric Cars Struggle in China (WSJ)
  • Harvard’s Days as the World’s Richest School May Be Numbered (Reuters)
  • Sears Dials Up Discounts to Record Levels as It Copes With Slump (BBG)
  • Zimbabwe’s Mugabe Makes First Public Appearance Since Military Takeover (WSJ)
  • Hassett Bets on 3% U.S. Growth That Summers Sees in Fairyland (BBG)
  • Two Weeks of Frenzied Negotiations Led to Bank-Relief Deal (WSJ)

 

Overnight Media Digest

WSJ

– The House of Representatives passed a bill that would usher in the most far-reaching overhaul of the U.S. tax system in 31 years, a plan that would reduce the corporate tax rate to its lowest point since 1939 and cut individual taxes for most households in 2018. on.wsj.com/2j1JjUr

– New suitors are circling Twenty-First Century Fox Inc , affirming that the media empire built by Rupert Murdoch is now in play. Comcast Corp has approached the media company. Verizon Communications Inc and Sony Corp are also kicking the tires. on.wsj.com/2j0i38O

– A federal judge declared a mistrial in the corruption trial of U.S. Sen. Bob Menendez, giving the Democrat a political lifeline and preserving his party’s control of the seat for the near future. on.wsj.com/2j1LebB

– Meredith Corp has made a takeover bid for storied magazine publisher Time Inc in the range of $17 to $20 a share, according to people familiar with the situation. on.wsj.com/2j0Ht6p

– An activist investor in Barnes & Noble Inc has proposed a transaction that would take the bookseller private with the help of current shareholders and a hefty dose of borrowings, an effort that could face formidable obstacles. on.wsj.com/2j0EvP6

– Emerson Electric Co boosted its takeover offer for Rockwell Automation Inc, ratcheting up an effort to bring its reluctant rival to the negotiating table and forge a new giant in industrial automation. on.wsj.com/2j21qd2

 

NYT

– With 227 Republican votes, the House passed the most sweeping tax overhaul in three decades on Thursday as U.S. lawmakers seek to enact $1.5 trillion in tax cuts for businesses and individuals and deliver the first major legislative achievement of President Donald Trump’s tenure. nyti.ms/2hDqQRs

– The cable company Comcast Corp is in preliminary talks to buy entertainment assets owned by Twenty-First Century Fox Inc, including a vast overseas television distribution business. nyti.ms/2hxkbof

– Tesla Inc has aimed to reinvent the automobile and the way electricity is generated for homes. In a presentation by its chief executive, Elon Musk, Tesla unveiled a prototype for a battery-powered, nearly self-driving semi truck that the company said would prove more efficient and less costly to operate than the diesel trucks that now haul goods across the country. nyti.ms/2zJPgzU

– The senior American diplomat at the United Nations climate talks in Germany told world leaders on Thursday that the United States would remain engaged in global climate change negotiations even as it planned to exit the Paris agreement “at the earliest opportunity.” nyti.ms/2ySE1Bd

– The Federal Communications Commission voted on Thursday to allow a single company to own a newspaper and television and radio stations in the same town, reversing a decades-old rule aimed at preventing any individual or company from having too much power over local coverage. nyti.ms/2zN7YpA


Britain

The Times

* Prudential Plc is scaling up its ambitions in Asia with plans to open a fund management venture in China and to double in size in the region every few years. bit.ly/2jxRjAk

* WPP said it was prepared to increase its stake in Asatsu-DK, one of the largest marketing services companies in Japan, to about a third after requests from other shareholders. bit.ly/2jwULvg

The Guardian

* The business secretary, Greg Clark, has been urged by the GMB union to block the proposed merger of German energy group Innogy’s British unit, npower with SSE’s British retail supply business .bit.ly/2jxZCMG

* The chief executive designate of GKN, Kevin Cummings, has been ousted from the FTSE 100 company weeks before he was due to take up the top job at the aerospace and engineering firm. bit.ly/2jz3GvX

The Telegraph

* Jaguar Land Rover has quietly started testing driverless cars on British roads that are simultaneously being used by the general public, in a clear indication that Britain’s biggest manufacturer is determined the country will play a leading role in the race to develop autonomous vehicles. bit.ly/2jyNx9Z

* The Serious Fraud Office has made its first charges against Unaoil employees in relation to a corruption scandal that has engulfed the oil and gas industry. bit.ly/2jy7he2

Sky News

* The boss of U.S. investment bank Goldman Sachs, Lloyd Blankfein, has used his latest Twitter post on Brexit to suggest a second referendum is held. bit.ly/2jyVwnr

* The GMB union’s Scotland secretary, Gary Smith, has told Sky News a dispute threatening 1,400 jobs is a battle for the future of skilled manufacturing in Scotland. bit.ly/2jy60U4

The Independent

* Rail passengers on the UK’s leading long-distance network face disruption and cancellations after Virgin Trains staff belonging to the RMT union voted to strike by a majority of 10 to one. ind.pn/2jvIwil

* Retail sales continued to grow in October according to the latest official data, easing some of the fears of a plunge in consumer spending. A survey of retailers by the CBI had suggested the fastest rate of decline in sales in October since the UK’s last recession in 2009. ind.pn/2jyWfFb

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BoE Deputy Governor Gives Crazy Speech Warning Markets Have Underestimated Rate Rises

On 2 November 2017, the Bank of England raised rates for the first time in a decade and Sterling’s initial rise was promptly sold off by forex traders as we discussed.

The 7-2 vote by the Monetary Policy Committee was not the unanimous decision some had expected, while Cunliffe and Ramsden saw insufficient evidence that wage growth would pick up in line with the BoE’s projections from just over 2% to 3% in a year’s time. Ben Broadbent, MPC member, deputy governor and known to be a close confidant of Governor Carney, gave a speech today at the London School of Economics (LSE) in which he warned markets that Brexit issues didn’t necessarily mean that interest rates have to remain low.

Bloomberg reports that Broadbent stated that the Brexit impact on monetary policy depends on how it affects demand, supply and the exchange rate.

"There are feasible combinations of the three that might require looser policy, others that lead to tighter policy."

Which sounds alot like he doesn't know, although he stuck to the central bankers trusty tool, reassuring LSE students the Phillips Curve "still seems to have a slope".

According to the FT.

The deputy governor of the Bank of England has warned that financial markets have underestimated the chance of further interest rate rises. In a speech at the London School of Economics on Wednesday, Ben Broadbent said markets had placed too much emphasis on the idea that interest rates needed to be kept low in the face of Brexit uncertainty. The deputy governor said it was “uncertain” and “complex” to anticipate how Brexit would affect inflation. But he rejected the assertion that Brexit “necessarily implies low interest rates”.

 

“Even as inflation rose, and the rate of unemployment fell further, interest-rate markets continued to under-weight the possibility that (the) bank rate might actually go up this year,” he said.

 

The BoE’s Monetary Policy Committee announced its first interest rate rise in more than a decade earlier this month. But the central bank has struggled to convince financial markets that it is likely to raise rates further.

 

BoE officials were taken aback when sterling sold off on the day it announced the rate rise, and two-year gilt yields remain below the BoE base rate, suggesting markets are sceptical that the MPC will raise rates further while there is still considerable uncertainty around the UK’s economic future outside of the EU.

Broadbent acknowledged that there is a risk that Brexit uncertainty could adversely impact UK demand. However, he sees the potential for other factors, a reduction in trade, for example, which could crimp UK capacity and necessitate a rise in rates. While Broadbent’s thinking is flawed, and his barley field example plainly ridiculous, the FT continues.

Brexit-related uncertainty could weigh on demand and motivate the MPC to keep interest rates low to support the economy, but other factors could push the central bank to raise rates.

 

For example, if Brexit reduced the UK’s openness to trade, the country’s output capacity could suffer, which would require the BoE to raise rates to temper inflation.

 

“Economists often presume that changes in an economy’s underlying productivity occur only slowly,” Mr Broadbent said. However, he added: “A sharp reduction in the degree of openness (to trade) could have a more immediate impact. “A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees”. He said the challenge for monetary policymakers was that “reductions in supply can add inflationary pressure even as they lower aggregate (gross domestic product)”.

So, let’s consider Broadbent’s example…

The UK suffers a drop in aggregate demand due to a contraction in trade, the BoE raises rates in an over-leveraged economy to stem the inflation and…undoubtedly makes the contraction in GDP much worse. That makes no sense and is the kind of one dimensional thinking that we’ve had to put up with from central bankers. What’s worse is that Broadbent has specific responsibility for monetary policy and a c.v. as long as your arm – Cambridge, Harvard PhD, Fulbright Scholar, Columbia University, Goldman Sachs and UK Treasury.

It’s no wonder we are in such a mess with people like this pulling the levers of policy in the central banks. Crazy ideas aside, Broadbent and his BoE colleagues might be unhappy with market projections for the future path of interest rates, but they can hardly blame investors for being sceptical.

Which way are rates going, Ben?

 

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White House Considering Mohamed El-Erian For Fed Vice Chair

In what will come as a big surprise to many Fed watchers, moments ago the WSJ reported that among other candidates, Mohamed El-Erian, former deputy director of the IMF, former head of the Harvard Management Company, Bill Gross’ former partner at Pimco until the duo’s infamous falling out, and one of the few people who – together with John Taylor – actually deserve the nomination, is being considered for the Fed Vice Chairman role. DJ also added that Kansas banking regulator Michelle Bowman is also being considered. From the WSJ:

The White House is considering economist Mohamed El-Erian as one of several candidates to potentially serve as the Federal Reserve’s vice chairman, according to a person familiar with the matter.

The process of selecting the Fed’s No. 2 official began this month after President Donald Trump nominated Fed governor Jerome Powell to succeed Fed Chairwoman Janet Yellen when her term expires next February.

The WSJ adds that there is a broad range of candidates under consideration for post, and that the White House will focus on monetary policy experience for post.

Reportedly, the White House is also considering the nomination of a Kansas banking regulator for a seat on the Fed’s board of governors, according to two people familiar with the matter.

Michelle Bowman was confirmed as the Kansas bank commissioner in January and would be nominated to a spot reserved for a community banker or regulator of community banks. In 2014, Congress reserved one of seven seats on the Fed’s board for a community banker and the position has never been filled.

For those unfamilair, here are some recent perspectives on El-Erian’s recent thoughts:

And some recent notable quotables:

  • The Fed’s embarked on this beautiful normalization: It has stopped [quantitative easing], it has raised rates, it has declared a path to reduce its balance sheet without disrupting markets and without derailing the global recovery. And I don’t think anybody will want to mess with this beautiful normalization”
  • “We don’t understand very well why inflation is low. And therefore, should inflation be an over-determining factor in monetary policy? On the other hand, how concerned is the Fed about elevated asset prices?”
  • “I suspect the market is too sanguine when it comes to how much central bankers are thinking about the risk of financial instability down the road.”

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ICOs VS. Venture Capital and Banks

Traditionally, if you have a great business idea but lack the finances to get the project started, you would pursue funding through a venture capital outlet. There are hundreds of venture capital firms that spend tens of billions of dollars helping businesses get off the ground. However, not all startups attain venture capital funding, and some estimates on venture capital rejections are as high as 99%. In this way, attaining venture capital funding can feel like an episode of Shark Tank in which brilliant startup ideas are at the mercy of a wealthy cadre that determines their future.

 

The process of attaining venture capital is dubious, and it’s muddled by rumor, speculation, and ambition. The Harvard Business Review explains that “One myth is that venture capitalists invest in good people and good ideas. The reality is that they invest in good industries.” In general, this means that most companies seeking venture capital are unqualified based solely on their industry. HBR goes on to note that only “10% of all U.S. economic activity occurs in segments projected to grow more than 15% a year over the next five years.” As a result, startups are forced to spend valuable money and talent just to ensure that the process of attaining more capital goes as smoothly as possible, even without a fundraising guarantee.

 

For a long time, venture capital has been the financial mechanism for achieving the American, and now the universal, dream of launching a business and achieving independent success. Fortunately, emerging blockchain technology is making it possible for companies to raise capital through ICOs or various blockchain powered  platforms such as Starbase, without succumbing to the costly, high-risk pursuit of venture capital.

 

The blockchain is the decentralized ledger system that powers popular cryptocurrencies like Bitcoin and Ethereum. It has accounted for these cryptocurrencies with unbridled security, capability, and reliability. More importantly, for startups looking to acquire capital, this technology allows companies to launch independent crypto-tokens that provide specific benefits to purchasers and provide valuable capital for the company.

 

These tokens, known as Initial Coin Offerings (ICOs), have grown increasingly popular this year. According to CNBC, “In 2017, there have been 92 ICOs which collectively have raised $1.25 billion.” Already, ICOs have surpassed venture capital in funds raised, and, as more people grow accustomed to the practice, it looks poised to continue to proliferate.

 

ICOs have many benefits for companies and consumers. First, ICOs represent the democratization of capital raising. While venture capital relies on a small cadre of rich bankers to supply funds, ICOs allow average investors and interested parties to support companies and projects that they believe in. Moreover, the personal buy-in from ICO funders ensures a group of loyal supporters who have an interested stake in the company’s success. As The Wall Street Journal notes, “It’s a way for these companies to raise lots of money without giving up decision-making power to venture capitalists or surrendering any equity to them.” For consumers, they receive valuable perks for projects that they personally believe in. To accompany their ICOs, companies offer everything from exclusive access to discounts and everything in between.

 

Of course, launching an ICO isn’t without its challenges. Creating a crypto-token requires programming and coding skills that most people don’t have and that most startups can’t afford. The prohibitive costs are made even more challenging by the fast-paced environment of the ICO ecosystem. As legislators and regulators grapple with the significance of ICO funding, new laws or even outright bans are being put in place that are dampening company’s abilities to raise funds in this way. For example, this fall China implemented an outright ban on ICOs until regulatory oversight and legal procedures could be devised and implemented. There is a real benefit to companies being able to quickly develop and release an ICO so that they can enjoy the full potential of the ICO marketplace.

 

One way that ICOs are being made simpler and easier to implement is through launch platforms like Starbase. Their platform allows companies to quickly conceive of and launch a digital token without having to manage the technical aspects of the process. “It’s like an equity funding platform in terms of the due diligence done on the startups” states Tomoaki Sato, CEO and founder of Starbase in an interview. Much like Squarespace makes it easy for everyone to launch a website, Starbase allows companies to effectively launch ICOs without having to employ the technical or logistical know-how. Easy-to-use platforms like this allow companies to avoid many of the pitfalls associated with ICOs while maximizing the potential of this rapidly increasingly capital raising mechanism.

 

Every capital raising enterprise has its place. Venture capital will continue to serve a limited portion of the population by providing funding and expertise. However, as HBR acknowledged, “the venture capitalist buys a stake in the entrepreneur’s idea, nurtures it for a short period of time, and then exits with the help of an investment banker.” Meanwhile, companies can utilize platforms like Starbase to quick launch digital tokens that can fund new projects, create community investment, and provide new, previously unreachable opportunities. ICOs may be the future of capital raising, and they are already poised to make a real difference for many startups.

 

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Ding Dong Dandong – First Chinese Corporate Default After Party Congress

Just over a week ago we highlighted how China’s financial regulator had instructed companies to delay the reporting of bad corporate news until after the Party Congress. As Bloomberg noted…

China’s securities watchdog has asked some loss-making companies to avoid publishing quarterly results this week as authorities seek to ensure stock-market stability during the Communist Party Congress, according to people familiar with the matter.

 

The China Securities Regulatory Commission made its requests via the country’s stock exchanges, the people said, asking not to be named as they’re not authorized to talk to the media.

 

At least 17 Shenzhen-listed companies announced delays to their earnings reports from Oct. 20 to Oct. 24, up from three during the same period last year, exchange filings show.

Now that the Congress is out of the way, announcements of corporate debt defaults are also reportable it seems.

The latest relates to Dandong Port Group as the WSJ reports

A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing’s campaign to weed out risks in the financial system.

 

Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday.

 

A company statement cited “heavy interest-bearing debt burdens and high short-term payment pressure” and said it is working with underwriters to repay the investors.

 

The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years to handle soybean imports from the U.S. and coal from Mongolia, even as much of northeast China’s resource-heavy economy struggled. International sanctions on North Korea have pinched some trade, though a company representative said the port halted business with the country in 2010 and so hasn’t been affected by the restrictions.

The timing of the Dandong default is also noteworthy, coming shortly after PBoC Governor, Zhou Xiaochuan, warning on the sidelines of the Party Congress. Zhou warned about the high level of corporate debt and the risk of a “Minsky Moment.”

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction., what we call a ‘Minsky Moment’. That’s what we should particularly defend against.”

As WSJ notes, Dandong Port’s default is one of the largest this year…

“The real market is slowly coming out, after the congress,” said Shen Meng, director at Beijing-based investment bank Chanson & Co. “Dandong Group’s problems reflect the lackluster state of the whole Chinese economy and the northeast region.”

Defaults, still rare in China, are expected to increase following that congress, which handed President Xi Jinping a second five-year term and endorsed his broad program to make China a rich world power. To do that, Mr. Xi emphasized that the government will sustain a push begun this year to reduce high levels of debt that might pose a risk to the financial system. Money is increasingly tight for Chinese companies as banks respond to government calls to more closely scrutinize borrower business plans and authorities crack down on riskier financing plays. Yields on triple-A rated five-year corporate bonds are at nearly 5%, compared with 3.9% at the beginning of the year. Chinese firms have defaulted on 35 bond payments this year, compared with 78 last year and 23 in 2015, according to data from Shanghai Wind Information Co.

When asked whether Dandong Port expected the authorities to help, a company representative was non-committal, saying that they have always worked closely with local government. The WSJ provided more details on the default…

Dandong Port’s 1 billion yuan in bonds, issued in 2014, carried a coupon rate of 5.86% in annualized interest. Though the company made the 58.6 million yuan in interest due Monday, it couldn’t meet payment of principal on the bonds, whose investors exercised an option to sell them to the company early. Dandong’s profits have been sliding, and the firm warned about debt risks last year. The company has more than 40 billion yuan in unpaid debt, including several billion yuan in bonds, according to its half-year statement issued in August. It had a 76% debt-to-asset ratio as of last year.

 

The company’s controlling shareholder, Wang Wenliang, was replaced as Dandong Port’s legal representative this August, although he remains in control of Dandong Port through two corporate entities, one of which is based in Hong Kong, according to company filings.

Our question is whether the Dandong default is part of a post-Congress willingness to allow over-leveraged entities in the private sector to go to the wall. If so, we might see a flurry of similar events in the coming months. Alternatively, was the failure (so far) of the authorities to bailout Dandong part of Xi’s ongoing crackdown on corruption?

Wang Wenliang was implicated in vote-rigging scandal in 2016, as the Journal notes…

A fixture on lists of China’s wealthiest people, Mr. Wang has surfaced in separate scandals in China and the U.S. in recent years. He was one of several dozen deputies from Liaoning province expelled from China’s legislative body last year in a vote-buying scandal. In the U.S., his political funding and other donations have also been scrutinized. His construction business Rilin Enterprises, for instance, gave $1 million to $5 million to the Clinton Foundation since its founding, according to records published by the organization co-founded by the former candidate Hillary Clinton.

 

A spokeswoman for Mr. Wang put his total donations to the foundation around $2 million. Also last year, The Wall Street Journal reported the Federal Bureau of Investigation had also examined a $120,000 donation by a U.S. business owned by Mr. Wang to then-Virginia Gov. Terry McAuliffe. Mr. Wang has also donated to U.S. universities including Harvard and at least one think tank, the Center for Strategic and International Studies. There is no sign that any of the donations was illegal. Spokesmen for the recipients and for Mr. Wang have pointed out that he has significant business in the U.S.

Whatever the reason for allowing the Dandong default, life is getting tougher for the over-leveraged Chinese corporate sector. From Bloomberg’s take on the Dandong default

Bond yields in China have surged after central bank governor Zhou Xiaochuan voiced concern about high corporate borrowing on Oct. 15. That sparked a 16 basis point jump in the average yield on AA- rated corporate securities this month, set for the biggest increase since May, according to China bond data. Twenty onshore bonds have defaulted this year, compared with 21 in the same period of 2016, according to Bloomberg-compiled data. 

 

“The rising borrowing costs have eroded companies’ profits and made it more and more difficult to roll over existing debt,” Xu Hanfei and Li Yuze, analysts at China Merchants Securities Co. said in a report Tuesday, commenting on the default.

In the end, debt will out, even in China.

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Trump Heralds GOP “Anger, Unity” As WSJ Warns Dems “The Russian Dossier Dam Is Breaking”

In a series if tweets this morning, President Trump has exposed some of the narratives that much of the mainstream media seems loathed to touch…

Never seen such Republican ANGER & UNITY as I have concerning the lack of investigation on Clinton made Fake Dossier (now $12,000,000?), the Uranium to Russia deal, the  33,000 plus deleted Emails, the Comey fix and so much more.

 

Instead they look at phony Trump/Russia "collusion," which doesn't exist.

 

The Dems are using this terrible (and bad for our country) Witch Hunt for evil politics, but the R's are now fighting back like never before.

 

There is so much GUILT by Democrats/Clinton, and now the facts are pouring out. DO SOMETHING!

And while Democrats and their mouthpieces continues to try and focus attention on the unverified frivolous claims within the dossier – as opposed to the illegalities of the dossier's production, collusion, and exhibition – The Wall Street Journal's Holman Jenkins warns then that the Trump Dossier dam is breaking

A U.S. political party applied to a hostile power for lurid stories about a domestic opponent.

’Tis the season of tossing out nondisclosure agreements. Victims and employees of Harvey Weinstein clamor to be released from their NDAs so they can talk about his abuse. Perkins Coie, the Washington law firm for the Democratic Party and Hillary Clinton campaign, showed the way by voluntarily releasing Fusion GPS from its duty to remain mum on Democrats who funded the notorious Trump dossier.

May the example catch on.

Journalists who investigated the Trump dossier now say their Democratic sources lied to them. That’s already a start. Please, Democrats, release journalists from their confidentiality agreements so they can tell us more about your lying.

The revelations provide new context for Harry Reid’s “October surprise,” his attempt 10 days before Election Day to lever the dossier’s allegations into the press with a public letter to then-FBI Director James Comey accusing him of withholding “explosive information.”

Mr. Reid knows how the responsible press works. Implausible, scurrilous and unsupported allegations are not reportable, but a government official making public reference to such allegations is reportable.

Mr. Reid, though, failed to mention his party’s role in concocting the allegations, much less that the manner of its doing so left him no reason to suppose the charges were anything but tall tales spun by Russian intelligence officials in response to danglings of Democratic money.

This is a completely novel tactic in U.S. politics, applying to a hostile foreign power for lurid stories about a domestic opponent. Mr. Reid, please tell us more about your role.

Let’s also hear from Adam Schiff, top Democrat on the House Intelligence Committee.

He claimed on TV to have “circumstantial” and “more than circumstantial” evidence of Trump collusion with Russia.

In the event, what he delivered in a committee hearing was a litany of routine, innocuous business and diplomatic contacts between Trump associates and Russian citizens, interspersed with claims from the Trump dossier.

He failed to mention, though, that the Trump dossier was manufactured by Democrats paying a D.C. law firm to pay a D.C. “research” firm to pay a retired British spook to pay unknown, unidentified Russians to tell stories about Mr. Trump, in reckless disregard for whether the stories were true.

Mr. Schiff, a Harvard Law graduate, will know the phrase is not our coinage. “Reckless disregard” is the standard by which the Supreme Court says, even in a country that bends over backward to protect the press at the expense of public figures, the press can be held liable for defamatory untruths about a public figure.

Even so, journalists are presumed to know their sources, not to have paid a long chain of surrogates to elicit sensational claims from perfect strangers, let alone anonymous agents of a foreign regime with a known habit of disinformation. It is impossible to exaggerate how reckless Democrats have been under this standard. If they found the Trump dossier on the sidewalk, they’d be in a better ethical position now. Let’s hear what Mr. Schiff knew and when he knew it.

Finally, let us hear from James Comey.

The Trump dossier was reckless and irresponsible in the extreme, but only consequential after Election Day. It didn’t prevent Mr. Trump from becoming president.

In the new spirit of non-non-disclosure, it’s time for Mr. Comey to tell us about the Russian intelligence scam that may really have changed the election outcome.

In closed hearings, he reportedly acknowledged that his intervention in the Hillary Clinton email case was prompted by what is now understood to have been planted, fake Russian intelligence. The fake Russian intelligence purported to discuss a nonexistent email between then-DNC chief Debbie Wasserman Schultz and George Soros-employed activist Leonard Benardo.

This led directly to Mr. Comey’s second intervention, reopening the case 11 days before Election Day, a shocking development that appears now to have moved enough votes into Mr. Trump’s column to account for his win.

At the time, the press was all too happy to blame Bill Clinton for his wife’s loss when Mr. Comey, for nonclassified consumption, cited Mr. Clinton’s tarmac meeting with Attorney General Loretta Lynch as the reason for his intervention.

The press is silent now.

The new story satisfies nobody’s agenda, and only makes the FBI look foolish. Mr. Trump is not eager to hear his victory portrayed as an FBI-precipitated accident. Democrats cling to their increasingly washed-out theory of Trump-Russia collusion.

And yet, if Mr. Comey’s antic intervention in response to Russian disinformation inadvertently led to Mr. Trump becoming president, this was the most consequential outcome by far.

*  *  *

President Trump has the final word however, asking (and answering a key question) – All of this “Russia” talk right when the Republicans are making their big push for historic Tax Cuts & Reform. Is this coincidental? NOT!

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OxyContin Nation: Meet The Billionaire Family Who Helped Spark America’s Opiod Crisis

Via StockBoardAsset.com,

Unbeknownst to many, the Sackler Family, with assets of $13 billion, the nation’s 19th wealthiest family is one the top players in philanthropy. You can find the Sackler Gallery in the Smithsonian museum in Washington, D.C. or visit the Sackler wing at the Metropolitan Museum of Art in New York City. The Sackler’s even have a museum at Harvard, Guggenheim, and dozen of universities around the country. If it’s art— the Sackler family has it.

Participating in the art game takes money and a lot of it. So, where does the Sackler money come from?

According to Forbes, the “Sacklers continue to reap hundreds of millions of dollars in profits from the businesses in 2016– some $700 million last year, by Forbes’ calculations – from an estimated $3 billion in Purdue Pharma revenues plus at least $1.5 billion in sales from their foreign companies”.

Forbes outlines a brief history lesson of how the Sackler family got started in the world of medicine-

The family fortune began in 1952 when three doctors — Arthur (d. 1987), Mortimer (d. 2010) and Raymond Sackler — purchased Purdue, then a small and struggling New York drug manufacturer. The company spent decades selling products like earwax remover and laxatives before moving into pain medications by the late 1980s. To create OxyContin, Purdue married oxycodone, a generic painkiller, with a time-release mechanism to combat abuse by spreading the drug’s effects over a half-day.

 

The FDA approved the medication in 1995 and it soon took off. By 2003 OxyContin sales hit $1.6 billion as the drug helped drive a huge nationwide spike in opioid prescribing. At its peak in 2012, doctors wrote more than 282 million prescriptions for opioid painkillers, including OxyContin, Vicodin and Percocet  — nearly enough for every American to have a bottle.

 

Now opioid prescriptions are declining amid increased scrutiny over drug addiction, down 12% since 2012 according to data from healthcare information firm IMS Health. OxyContin (which is also beginning to face competition from authorized generics while fighting to protect its patents over tamper-proof, extended-release oxycodone) saw prescriptions fall 17%.  

It wasn’t until the 1980’s, as explained by Forbes, the Sackler family through their family-owned drug company called Purdue Pharma created OxyContin. Then in 1995, the FDA approved the medication and sales exploded. Sales hit $1.6 billion in 2003, as a nationwide spike in opioids was seen. By the peak in 2012, doctors wrote more than 282 million prescription for opioid painkillers, such as OxyContin, Vicodin and Percocet. Good times for the Sacklers from 1996- 2012, as the family drug business exploded.

According to The New Yorker, Oxycontin ” has reportedly generated some thirty-five billion dollars in revenue for Purdue” since 1995. OxyContin’s sole active ingredient is oxycodone, a chemical cousin of heroin, which makes it highly addictive.

The New Yorker further says Purdue used marketing techniques to deceive the American public of the drug’s true addictive characteristics.

Purdue launched OxyContin with a marketing campaign that attempted to counter this attitude and change the prescribing habits of doctors. The company funded research and paid doctors to make the case that concerns about opioid addiction were overblown, and that OxyContin could safely treat an ever-wider range of maladies. Sales representatives marketed OxyContin as a product “to start with and to stay with.” Millions of patients found the drug to be a vital salve for excruciating pain. But many others grew so hooked on it that, between doses, they experienced debilitating withdrawal.

Oddly enough, around the time OxyContin was approved, prescription opioid deaths across the United States surged. Fast forward to more relevant times, where heroin and fentanyl deaths are exploding.

Diving into the opioid crisis onto the streets of Baltimore. It’s very common to see local citizens shooting up heroin on city streets. In this video, I asked a man how did this addiction start? Guess what he said?… It all started with legal painkillers, such as OxyContin. 

As a few parasitical elites make billions flooding America’s streets with opioids. We the every day American citizen have to deal with the consequences, as President Trump outlined in yesterday’s opioid crisis speech:

  • In 2016, more than two million Americans had an addiction to prescription or illicit opioids.
  • Since 2000, over 300,000 Americans have died from overdoses involving opioids.
  • Drug overdoses are now the leading cause of injury death in the United States, outnumbering both traffic crashes and gun-related deaths.
  • In 2015, there were 52,404 drug overdose deaths — 33,091 of those deaths, almost two-thirds, involved the use of opioids.
  • The situation has only gotten worse, with drug overdose deaths in 2016 expected to exceed 64,000.
  • This represents a rate of 175 deaths a day.

Bottomline: It’s time for the American people to learn the truth about the opioid crisis and the very few elites who have profited. The question You should ask: why did our government allow this to happen?

http://WarMachines.com

It Is Seven Times More Difficult To Get A Flight Attendant Job At Delta Than Enter Harvard

One of our preferred “off beat” economic indicators is how many workers apply at any one given moment in time for jobs that are hardly considered career-track. An example of this is the number of applicants for minimum wage line cook jobs at McDonalds, or flight attendant positions at Delta Airlines; conveniently, this is a series which we have tracked on and off for the past 7 years.

As regular readers may recall, back in October 2010, the Atlanta-based carrier received 100,000 applications for 1,000 jobs, an “acceptance ratio” of 1.0%. Things appeared to improve modestly in 2012 when Bloomberg reported that Delta had received 22,000 applicants for 300 flight attendant jobs: this pushed the acceptance ratio slightly higher to 1.3%, as by this point the job market had improved somewhat, and there were far better job career options available.

Fast forward to today when things have turned decidedly more grim for the US job market once again, at least based on this one particular indicator. According to CNN, Delta is once again on the hunt for new flight attendants, and has roughly 1,000 open positions for 2018, although this year the competition is virtually unprecedented: so far, Delta has received more than 125,000 applications for this hiring round, which all else equal would result in an acceptance ratio of 0.8%. Note, we said “virtually unprecedented” because this year ratio of applicants to open positions is identical to last year, when 150,000 people applied for 1,200 flight attendant jobs, resulting in an identical, 0.8% acceptance ratio.

So what makes it such a tough gig to land?

“You need to not only be a customer service professional, but also a safety expert,” said Ashton Morrow, a Delta spokeswoman.

Political correctness aside, you have to be young, relatively good looking, preferably a female (sorry, sexism does exist)… oh and willing to accept next to minimum wage.

Even so, one would think one is trying to get into Harvard: applicants first submit an application, then chosen candidates submit a video of themselves answering a set of questions. Selected candidates are then asked to come in for an in-person interview. Last year, 35,000 people made it to the video interview part. The candidate pool was then whittled down to 6,000 people for in-person interviews.

The Delta “admissions committee” was happy to chime in:

“After making it through the highly competitive and exhaustive selection process, they put all their previous experience and skills to the test during our flight attendant initial training,” said Allison Ausband, Delta’s senior vice president of in-flight service, in a release Monday.

Having made it so far through the process, in which the lucky candidate literally has to be better than 99 of their peers, the new hires go through an eight-week training program in Atlanta where they learn how to handle mid-flight emergencies like a fire or a sick passenger. The company describes the training program as “grueling” and that it will “stretch each trainee to the limit” in a video.

Finally, having reached the promised land, what untold wealth and riches await the lucky guy or gal? Well… nothing more than minimum wage: average entry-level flight attendants earn roughly $25,000 a year, according to the company. Wait, that’s it? Well, there are perks, such as the increasingly more unaffordable – for most – employee benefits which include health insurance coverage, 401(k) with a company match and a profit-sharing program. Workers also get travel privileges for themselves and family member.

Oh, and once hired, forget about having a personal life: “work-life balance can be tricky for flight attendants early in their careers since they don’t have a lot of control over their flight schedules.”

For any reader contemplating applying, here are the minimum qualifications:

applicants must be at least 21 years old, have a high school degree or GED and be able to work in the U.S. Flight attendants cannot have any tattoos that are visible while in the company’s uniform. Visible body piercings and earlobe plugs are also not allowed.

Putting this entire farcical process, which among other things demonstrates the true state of the US job market, Harvard’s acceptance rate for the class of 2021 was 5.2%. In other words, it is 6.5x times (round it up) easier to enter Harvard than to get a job at Delta. As an attendant.  And there is your jobs supply-demand reality in one snapshot.

P.S. it is somewhat easier to get the desired job if one fits the following physical parameters.

http://WarMachines.com

Yawning Debt Trap Proves the Great Recession is Still On

This article by David Haggith was published on The Great Recession Blog:

Published in the US before 1923 and public domain in the US. Used to represent people piling up America's national debt.

While David Stockman stated early this year with resolute certainty that the debt ceiling debate would blow congress up and send the nation reeling over the financial precipice, I avoided jumping on the debt-ceiling bandwagon. While I was convinced major rifts in the economy would start to show up in the summer, I was not convinced they would have anything to do with the debt ceiling debate. If there is anything you can be certain of this in endless recovery-mode economy, it is that the US will just keep pushing its bags of bonds up a hill until it can finally push no more. So, I figured another punt down the road was more likely.

 

The Debt Ceiling Debate that Didn’t Happen

 

The reason I didn’t think that debate would blow apart is that Republicans have more than once experienced the political reality that comes from taking the nation to the brink of default or of shutting down government. Each time that kind of thing has happened, it has hurt Republicans far more than it has hurt Democrats. I doubted establishment Repubs (the majority) had the stomach to take us through another credit downgrade, though I’ve noted such an event was possible.

Unsurprisingly to me, then, Congress did the only thing it seems to be capable of any more and just kicked that can a little further down the road with hardly a kerfuffle about it. Hurricane Harvey made things a lot easier for congress to kick the can again by providing a good excuse to dodge that unwanted debate on the basis of massive human suffering that truly did need tending to. Much-talked-about government shutdown put off for a better time

The debate was entirely avoided even as the national debt broke over the $20 trillion mark this summer, keeping US debt at more than 100% of GDP, which is the stratosphere we’ve been in since 2011.

 

A group of progressive economists affiliated with the University of Massachusetts predicted in 2013 that a debt burden [that reaches 90% of GDP for five years] would result in an annual growth rate of just 2.2 percent, which means economic stagnation. (Reason.com)

 

We’re already well past that five-year marker. Not surprisiing, then, that the Congressional Budgeting Office expects economic growth to stay at 1.8% through 2027.

 

George Will observed that the difference between 2 percent annual growth and 3 percent annual growth is the difference between a positive, forward-looking country in which politics recede from everyday life and a Hobbesian nightmare in which interest groups slug it out over a barely growing pie. Note that he was talking about 2 percent annual growth, which seems positively aspirational in the 21st century. (Reason.com)

 

By James Montgomery Flagg. (Cartoon by James Montgomery Flagg, via [1]) [Public domain], via Wikimedia Commons

Nation caught in a debt trap

 

The biggest (or most likely threat) from the national debt is what economists refer to as a debt trap. The nation can be considered caught in a debt trap if the Federal Reserve loses the ability to raise interest because the rise in interest would immediately drown the economy or cause the nation to default on its debt. So long as interest rates are low, the US government can afford its huge debt; however, we are now at a point where, if interest rates rise to historically normal levels, we’re in big trouble. That means we are in, at least, enough of a debt trap that interest rates can never be allowed to normalize.

Several debt traps are shaping up besides the one formed from government debt. One is the corporate debt trap, where corporations have kept earnings per share high by taking out huge piles of debt year after year to buy back shares. If businesses have to refinance all this debt at a higher interest rate, they could be in big trouble. We hear over and over that today’s high stock valuations are justified by the fact that earnings keep growing; but it is not top-line revenue that is growing, it is earnings per share, and most of that “growth” is due to corporations taking out debt in order to buy back shares and thus reduce the number of shares over which those earnings are divided. If interest rises, corporations will no longer be able to afford to buy back shares on debt, and that support for the market will crash. They might not even be able to afford to pay off the debt they have already taken on. So, there is another reason the Fed can never allow interest to normalize by historic standards.

Yet another debt trap now exists in personal credit where many households have reached peak debt. Household debt maxed out this summer above the level it had hit at the peak of the 2007 credit bubble — one more of those big signs of trouble in the economy that I said we could anticipate seeing by the time summer rolled around.

Income, in the meantime, has not improved in order to support this higher level of debt, now at a level that already proved unsupportable in the past. That puts the US back in the unstable position where households that already carry all the debt they can afford can be suddenly sunk if they have any variable-interest credit cards or an adjustable-rate mortgage. That is yet another reason the Fed can never allow interest rates to normalize.

 

Harvard economist Kenneth Rogoff warns that a sudden spike in interest rates is the biggest threat to the global economy…. People have got used to ultra-low interest rates….  “If something was to happen that pushes interest rates up, we could see a lot of soft spots — places where there is high debt — start to unravel,”Rogoff said. (NewsMax)

 

It should be no surprise, then, that the number of credit-card accounts moving into delinquency swung upward for the third consecutive quarter this summer, a nine-month trend not seen since the bottom of the 2009 crisis. Yet another summertime crack in the economy — one that is not large yet but will become large quickly if the Fed allows interest to move upward any more than it already has.

In short, the national economy is riddled with high debt everywhere, which leaves every area of the economy with little wiggle room. So, the one certain thing about the huge piles of debt that have built up in the last few years is that we have reached the point where they are actually starting to box the Fed in to where raising interest to combat inflation will not be possible because it will cause damage throughout the economy. The tide has already closed in around the Fed to where it can no longer move to normalize interest in any direction without going deeper into rising waters.

S&P’s chief economist, Beth Ann Bovino, wrote recently that “failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase any of the gains of the subsequent recovery.”

 

The Great Recession is still with us

 

If you want to get a sense of how the debt trap affects the nation’s real net worth, consider what the total gross domestic product of the United States looks like if you subtract all that debt that we’ve added each year in order to create that product:

 

 

US GDP Minus Debt Graph from Federal Reserve

Note: Federal Reserve Economic Data sheets express GDP in billions while Federal Debt is expressed in millions, so in this chart they multiply their data numbers for GDP by 1,000 in order to express both in terms of the number of millions (there being a thousand millions in every billion).

 

 

That is essentially the debt trap in a snapshot. And that’s just subtracting the federal debt from GDP. What would it look like if we subtracted out all the business debt that was piled up in the creation of our total domestic product and all the personal debt? You can see the picture looked positive right up until the Great Recession hit, and it has deteriorated precipitously ever since.

Based on this picture we have remained in a huge depression since the financial crisis. I have been saying all along that we are still in the Great Recession, which is why I called my blog The Great Recession Blog. The Great Recession still defines our present economy. We never exited; we just propped the economy up (created positive GDP) with mountains of debt (federal and corporate) so that we cannot feel how deep that depression really is; but the debt trap will suck us into this abyss as soon we can no longer sustain the creation of that debt. We have not powered out, as the Fed planned. If we had, GDP would be growing faster than debt.

We are essentially at that point of stark realization now as the Federal Reserve reduces its reinvestment in government debt (bonds) this month. (A process slated to start slow but to become huge by the end of 2018.) Until now, when a government bond matured during this past decade of Fed stimulus so that the government became responsible for repaying the bond principle to the Fed, the government just issued another bond, and the Fed bought that. The new issuance gave the government the money it needed to pay off the first bond. Now that the Fed is backing away from buying new government bonds (starting to divest), the government will be forced to find other financiers.

That will most likely raise the interest the US government has to pay in order to attract new buyers of its bonds, making the national debt less and less sustainable. What happens, then, to GDP as the government finds it harder to maintain its huge deficit spending that is propping up GDP (because the things government buys with that debt have always been included in GDP calculations)?

This unwinding scenario, of course, depends on what happens in the rest of the world because the US doesnt finance all of its debt internally. If Europe, for example, starts to collapse ahead of the US (as it now contemplates its own unwind), the US could once again prove to be the best looking horse in the glue factory and, so, still find ready foreign buyers at low interest for bonds that have to be issued to someone other than the Fed now that the Fed (the buyer of last resort) is backing away from repurchasing. That could purchase the US yet, again, a little more time. (That could just as easily swing the other way, of course, with the US collapsing first, sending money fleeing to Europe.)

Another way to look at our present situation since the Great Recession began — in order to see that its new economy stays with us — can be seen in this chart:

 

 

The trend line in GDP per capita (with government deficit spending still included in the calculation of GDP) broke off at the start of the Great Reession, and it clearly never recovered. It relentlessly sputters along at a decreased rate of growth. Moreover, it has only been maintained at that much lower trend because of the massive amounts of government debt and Fed stimulus. So, what happens to the new trend line when when that money is withdrawn from the economy and interest is allowed to rise?

The bags full of bonds we are pushing up the hill will become significantly heavier if interest rises and will exhaust us, and the present change in Fed repurchasing is a big enough change to tip that balance (given that the amount on the balance sheet the Fed is planning to now unwind is equal to more than 20% of GDP). That is why Jamie Dimon of JPMorgan Chase warned that we’ve never seen anything on the scale of what is about to happen and had better be careful.

One essential truth underlying this blog has always been that you cannot dig your way out of a debt-based financial crash by digging the debt trap deeper and deeper. I called my own site The Great Recession Blog because I believe the most fundamental truth about our current economy is that we are still in the Great Recession. It broke us for good in that we have not recovered from that event even with massive amounts of stimulus (beyond anything the world has ever attempted).  GDP looks marginally acceptable but only on the surface and is clearly continuously now on a lower trend. Underneath it all is a yawning pit of debt, more than capable of swallowing our entire economy.

http://WarMachines.com

93-Year-Old President Carter: Russians Didn’t Alter Election, Obama Didn’t Deliver, We Didn’t Vote For Hillary

Spot the odd one out…

Only one of these six people admits that Russians did not alter the election outcome and did not vote for Hillary…

In a lengthy interview with The New York Times recently, 93-year-old former President Jimmy Carter cut loose on some painful establishment 'facts'.

As DailyWire.com's Joseph Curl reports, The Times decided to play up the fact that Carter would love to go over to North Korea as an envoy. But the Times is steadily proving how out of touch it is — and how it no longer seems to actually "get" what real news is.

Here are some major highlights from the interview:

1. The Russians didn't steal the 2016 election.

Carter was asked "Did the Russians purloin the election from Hillary?"

 

"I don’t think there’s any evidence that what the Russians did changed enough votes — or any votes," Carter said.

 

So the hard-left former president doesn't think the Russians stole the election? Take note, Capitol Hill Democrats.

2. We didn't vote for Hillary.

Carter and his wife, Roselyn, disagreed on the Russia question. In the interview, she "looked over archly [and said] 'They obviously did'" purloin the election.

 

“Rosie and I have a difference of opinion on that,” Carter said.

 

Rosalynn then said, “The drip-drip-drip about Hillary.”

 

Which prompted Carter to note that during the primary, they didn't vote for Hillary Clinton. "We voted for Sanders.”

3. Obama fell far short of his promises.

Barack Obama whooshed into office on pledges of delivering "hope and change" to the country, spilt by partisan politics.

 

He didn't. In fact, he made it worse.

 

"He made some very wonderful statements, in my opinion, when he first got in office, and then he reneged on that," he said about Obama's action on the Middle East.

4. Media "harder on Trump than any president."

A recent Harvard study showed that 93% of new coverage about President Trump is negative.

 

But here's another shocker: Carter defended Trump.

 

"I think the media have been harder on Trump than any other president certainly that I've known about," Carter said. "I think they feel free to claim that Trump is mentally deranged and everything else without hesitation."

5. NFL players should "stand during the American anthem."

Carter, who joined the other four living ex-presidents on Saturday for a hurricane fundraiser, put his hand on his heart when the national anthem played — and he has a strong opinion about what NFL players should do, too.

 

"I think they ought to find a different way to object, to demonstrate," he said. " I would rather see all the players stand during the American anthem."

*  *  *
Not exactly the narrative The Times was painting…

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These Are The Top Geopolitical Risks According To The World’s Largest Asset Manager

Like many others, the world's largest money manager with $5.9 trillion in (ETF) investments, BlackRock, is not too worried about a market which no matter what, promptly rebounds from any and every selloff, and seems to close at all time highs day after day as if by magic. To be sure, BlackRock's employees are delighted: the less the volatility, and the higher the S&P goes, the more likely retail investors are to hand over their cash to BlackRock. So far so good. Still, not even Blackrock can state that after looking at this chart, which unveils unprecedented economic policy uncertainty at a time when equity uncertainty has never been lower…

… that everything is ok.

And it doesn't: in a blog post by BlackRock's Isabelle Mateos y Lago, Blackrock's chief multi-asset strategist writes that while markets may be a sea of calm, geopolitics are anything but. As a result, the world's biggest ETF administrator has its eyes on 10 geopolitical risks and is tracking their likelihood and potential market impact, as it wrote recently in the firm's Global Investment Outlook Q4 2017.

The "world of risk" map below is a quick snapshot of all

Among the Top risks tracked by Blackrock are:

  • North American trade negotiations
  • Russia-NATO conflict
  • South China Sea conflict
  • US-China tensions
  • Escalations in Syria and Iraq
  • North Korea conflict
  • Fragmentation in Europe
  • Gulf conflicts

Of the risks listed above, which are the ones BlackRock is most worried about? According to Mateos y Lago, the top three right now: North American trade negotiations, a North Korea conflict and U.S.-China tensions, with the second and third particularly interrelated.

The details:

North American trade negotiations

The fourth round of North American Free Trade Agreement (NAFTA) renegotiations ended this week, with Mexico and Canada rejecting what they view as harsh U.S. proposals. Still, news reports did suggest apparent progress on less contentious parts of the agreement, and the negotiations aren’t over. The next round of talks are scheduled to take place in Mexico next month.

Our base case is that successful negotiations will be completed in early 2018. However, our hopes for this outcome have recently diminished given tough positions from U.S. negotiators and threatening rhetoric from U.S. President Donald Trump that has resulted in greater uncertainty. Market risks are biased to the downside given that a good outcome is priced in, in both Canadian and Mexican markets.

* * *

North Korea

We view North Korea’s missile and nuclear weapons program as a major threat to regional stability, U.S. security and nuclear non-proliferation. The possibility of armed conflict has risen, we believe, given North Korea’s missile launches over Japan, a nuclear test and an intense war of words. This has raised the chance of misstep or miscalculation, and we could see limited action such as the shooting down of missiles.

Yet we currently see a low probability of all-out war; the costs are too high on all sides. Instead, we expect the U.S. to intensify its “peaceful pressure” campaign, evident in imposing unilateral sanctions and leaning hard on China to participate. We see the crisis straining U.S.-China relations just as economic tensions are rising.

* * *

Deteriorating U.S.-China relations

We see frictions between the U.S. and China heating up over time. The countries risk falling into the “Thucydides Trap,” a term coined by Harvard scholar Graham Allison to describe clashes between rising powers and established ones. We see trade and market access disputes straining an increasingly competitive U.S.-China relationship in the long run, and believe markets have yet to factor in this gradual deterioration.

In the short term, tensions could rise if Chinese President Xi Jinping pursues an even more nationalistic agenda in the wake of the National People’s Congress. Economic tit for tats could lead to an erosion of relations—and have sector-specific effects.

U.S. military action against North Korea and/or an accidental clash in the South China Sea would deal a blow to the relationship, in our view, and hurt risk assets. But our base case is that the U.S. and China avoid these land mines in the short term, and try to use President Trump’s upcoming visit to emphasize cooperation.

Taking the above in context, what is BlackRocks recommendation for portfolios? The good news, according to the author, is that most geopolitical shocks have short-lived market impacts, except in regions directly affected. For those who wish to hedge, Blackrock recommends government bonds as useful diversifiers against volatility and equity market selloffs sparked by such shocks.

* * *

Meanwhile, in a separate observation, Rick Rieder, Blackrock's global fixed income CIO pointed out another recurring, and ominous trend: "major central banks flooded global financial system with near $10T in liquidity since 2008, but now we’re beginning to unwind"

… which leads to the question: "will others (foreign-exchange reserves, banks) step in to provide liquidity, so the transition doesn’t derail growth?"

The answer: it all depends on China.

http://WarMachines.com

Ralph Nader: How CEO Stock Buybacks Parasitize The Economy

Authored by Ralph Nader via Evonomics.com,

The monster of economic waste – over $7 trillion of dictated stock buybacks since 2003 by the self-enriching CEOs of large corporations – started with a little noticed change in 1982 by the Securities and Exchange Commission (SEC) under President Ronald Reagan. That was when SEC Chairman John Shad, a former Wall Street CEO, redefined unlawful ‘stock manipulation’ to exclude stock buybacks.

Then after Clinton pushed through congress a $1 million cap on CEO pay that could be deductible, CEO compensation consultants wanted much of CEO pay to reflect the price of the company’s stock. The stock buyback mania was unleashed. Its core was not to benefit shareholders (other than perhaps hedge fund speculators) by improving the earnings per share ratio. Its real motivation was to increase CEO pay no matter how badly such burning out of shareholder dollars hurt the company, its workers and the overall pace of economic growth. In a massive conflict of interest between greedy top corporate executives and their own company, CEO-driven stock buybacks extract capital from corporations instead of contributing capital for corporate needs, as the capitalist theory would dictate.

Yes, due to the malicious, toady SEC “business judgement” rule, CEOs can take trillions of dollars away from productive pursuits without even having to ask the companies’ owners—the shareholders—for approval.

What could competent management have done with this treasure trove of shareholder money which came originally from consumer purchases? They could have invested more in research and development, in productive plant and equipment, in raising worker pay (and thereby consumer demand), in shoring up shaky pension fund reserves, or increasing dividends to shareholders.

The leading expert on this subject—economics professor William Lazonick of the University of Massachusetts—wrote a widely read article in 2013 in the Harvard Business Review titled “Profits Without Prosperity” documenting the intricate ways CEOs use buybacks to escalate their pay up to  300 to 500 times (averaging over $10,000 an hour plus lavish benefits) the average pay of their workers. This compared to only 30 times the average pay gap in 1978. This has led to increasing inequality and stagnant middle class wages.

To make matters worse, companies with excessive stock buybacks experience a declining market value. A study by Professor Robert Ayres and Executive Fellow Michael Olenick at INSEAD (September 2017) provided data about IBM, which since 2005 has spent $125 billion on buybacks while laying off large numbers of workers and investing only $69.9 billion in R&D. IBM is widely viewed as a declining company that has lost out to more nimble competitors in Silicon Valley.

The authors also cite General Electric, which in the same period spent $114.6 billion on its own stock only to see its stock price steadily decline in a bull market. In a review of 64 companies, including major retailers such as JC Penny and Macy’s, these firms spent more dollars in stock buybacks “than their businesses are currently worth in market value”!

On the other hand, Ayes and Olenick analyzed 269 companies that “repurchased stock valued at 2 percent or less of their current market value (including Facebook, Xcel Energy, Berkshire Hathaway and Amazon). They were strong market performers. The scholars concluded that “Buybacks are a way of disinvesting – we call it ‘committing corporate suicide’—in a way that rewards the “activists” (e.g. Hedge Funds) and executives, but hurts employees and pensioners.”

Presently, hordes of corporate lobbyists are descending on Washington to demand deregulation and tax cuts. Why, you ask them? In order to conserve corporate money for investing in economic growth, they assert. Really?! Why, then, are they turning around and wasting far more money on stock buybacks, which produce no tangible value? The answer is clear: uncontrolled executive greed!

By now you may be asking, why don’t the corporate bosses simply give more dividends to shareholders instead of buybacks, since a steady high dividend yield usually protects the price of the shares? Because these executives have far more of their compensation package in manipulated stock options and incentive payments than they own in stock.

Walmart in recent years has bought back over $50 billion of its shares – a move benefitting the Walton family’s wealth – while saying it could not afford to increase the meagre pay for over one million of their workers in the US. Last year the company bought back $8.3 billion of their stock which could have given their hard-pressed employees, many of whom are on welfare, a several thousand dollar raise.

The corporate giants are also demanding that Congress allow the repatriation of about $2.5 trillion stashed abroad without paying more than 5% tax. They say the money would be used to grow the economy and create jobs. Last time CEOs promised this result in 2004, Congress approved, and then was double-crossed. The companies spent the bulk on stock buybacks, their own pay raises and some dividend increases.

There are more shenanigans. With low interest rates that are deductible, companies actually borrow money to finance their stock buybacks. If the stock market tanks, these companies will have a self-created debt load to handle. A former Citigroup executive, Richard Parsons, has expressed worry about a “massively manipulated” stock market which “scares the crap” out of him.

Banks that pay you near zero interest on your savings announced on June 28, 2017 the biggest single buyback in history – a $92.8 billion extraction. Drug companies who say their sky-high drug prices are needed to fund R&D. But between 2006 and 2017, 18 drug company CEOs spent a combined staggering $516 billion on buybacks and dividends – more than their inflated claims of spending for R&D.

Mr. Olenick says “When managers can’t create value in the business other than buying their own stock, it seems like it’s time for a management change.”

Who’s going to do that? Shareholders stripped of inside power to control the company they own? No way. It will take Congressional hearings, a robust media focus, and the political clout of large pension and mutual funds to get the reforms under way.

When I asked Robert Monks, an author and longtime expert on corporate governance, about his reaction to CEOs heavy with stock buybacks, he replied that the management was either unimaginative, incompetent or avaricious – or all of these.

Essentially burning trillions of dollars for the hyper enrichment of a handful of radical corporate state supremacists wasn’t what classical capitalism was supposed to be about.

http://WarMachines.com

“You May Be Hopping Mad When You Finish Reading This”

Submitted by John Mauldin of Mauldin Economics

Uncle Sam’s Unfunded Promises

Here’s a surprisingly profound question: What is a promise? Dictionaries offer various definitions. I like this one: “An express assurance on which expectation is to be based.”

That definition captures the two-sided nature of a promise. One party offers an assurance, which the other converts into an expectation. You deposit money in your checking account, and the bank assures you that you can have it back on demand. You expect that the bank will fulfill its promise when you visit an ATM.

Governments likewise make promises, but those are different. Government is the ultimate enforcer of promises, but we have no recourse if it chooses to break them – except at the ballot box. As we’ve seen in recent weeks regarding public pensions, that’s ineffective when the promises were made long ago by officials who are no longer in office.

The federal government’s keeping its promises is important for everyone in the US, because almost all of us are part of the largest public pension system: Social Security. We pay taxes our whole working lives and expect the government to give us retirement benefits. But what happens if it can’t?

Three weeks ago we visited the problems with local and state pensions. Last week we looked at European pensions. This week we are going to take a hard look at the unfunded liabilities and debt of the US government. And even though the federal unfunded pension liabilities dwarf those of state and local pensions, I want to make it clear that I believe the state and local problems will be far more intractable.

I have to warn you: You may be hopping mad when you finish reading this.

* * *

Doubled Debt

In the United States we have two national programs to care for the elderly. Social Security provides a small pension, and Medicare covers medical expenses. All workers pay taxes that supposedly fund the benefits we may someday receive. That’s actually not true, as we will see in a little bit.

Neither of these programs is comprehensive. Living on Social Security benefits alone is a pretty meager existence. Medicare has deductibles and copayments that can add up quickly. Both programs assume people have their own savings and other resources. Nevertheless, the programs are crucial to millions of retirees, many of whom work well past 65 just to keep up with their routine expenses. This chart from my friend John Burns shows the growing trend among generations to work past age 65. Having turned 68 a few days ago, I guess I’m contributing a bit to the trend:

Limited though Social Security and Medicare are, we attribute one huge benefit to them: They’re guaranteed. Uncle Sam will always pay them – he promised. And to his credit, Uncle Sam is trying hard to keep his end of the deal. In fact, he’s running up debt to do so. Actually, a massive amount of debt:

Federal debt as a percentage of GDP has almost doubled since the turn of the century. The big jump occurred during the 2007–2009 recession, but the debt has kept growing since then. That’s a consequence of both higher spending and lower GDP growth.

In theory, Social Security and Medicare don’t count here. Their funding goes into separate trust funds. But in reality, the Treasury borrows from the trust funds, so they simply hold more government debt.

The Treasury Department tracks all this, and you can read about it on their website, updated daily. Presently it looks like this:

  • Debt held by the public: $14.4 trillion
  • Intragovernmental holdings (the trust funds): $5.4 trillion
  • Total public debt: $19.8 trillion

Total GDP is roughly $19.3 trillion, so the federal debt is about equal to one full year of the entire nation’s collective economic output. In fact, it’s even more when you consider that GDP counts government spending as “production,” even when Uncle Sam spends borrowed money. Of course, that total does not count the $3 trillion-plus of state and local debt, which in almost every other country of the world is included in their national debt numbers. Including state and local debt in US figures would take our debt-to-GDP above 115%. And rising.

You can quibble over the calculations, but there’s no doubt the numbers are astronomically huge and growing. And we haven’t even mentioned the huge and growing private debt.

Just wait. We’re only getting started.

Yes, Trillions

We in the business world put a lot of faith in accountants. We trust them to count the beans honestly and give us accurate reports. We may not like the numbers (I was certainly distraught with my final tax numbers this year!), but we mostly believe them. Nothing will make a company’s stock drop faster than accounting irregularities will.

Government accounting is, well, different. The government doesn’t need to make a profit, but we expect it to spend our tax money wisely and to deliver services efficiently. That’s not possible unless there is reliable accounting. But reliable accounting is the last thing most politicians want – it constrains them from promising things they can’t deliver. So we have to take all government numbers with many grains of salt.

However, there is one chink in the politicians’ armor. An old statute requires the Treasury to issue an annual financial statement, similar to a corporation’s annual report. The FY 2016 edition is 274 enlightening pages that the government hopes none of us will read.

Among the many tidbits, it contains a table on page 63 that reveals the net present value of the US government’s 75-year future liability for Social Security and Medicare. That amount exceeds the net present value of the tax revenue designated to pay those benefits by $46.7 trillion. Yes, trillions.

Where will this $46.7 trillion come from? We don’t know. Future Congresses will have to find it somewhere. This is the fabled “unfunded liability” you hear about from deficit hawks. Similar promises exist to military and civil service retirees and assorted smaller groups, too. Trying to add them up quickly becomes an exercise in absurdity. They are so huge that it’s hard to believe the government will pay them, promises or not.

Now, I know this is going to come as a shock, but that $46.7 trillion of unfunded liabilities is pretty much a lie. My friend Professor Larry Kotlikoff estimates the unfunded liabilities to be closer to $210 trillion. When presidential candidate Ben Carson last year quoted Kotlikoff’s numbers, the Washington Post, New York Times, and other mainstream media immediately attacked him. Of course, the journalists doing the attacking had agendas, and none of them were economists or accountants. None. Zero. Zip.

Larry responded in an article in Forbes, since Carson was using his data:

The fiscal gap is the present value of all projected future expenditures less the present value of all projected future taxes. The fiscal gap is calculated over the infinite horizon. But since future expenditures and taxes far off in the future are being discounted, their contribution to the fiscal gap is smaller the farther out one goes. The $210 trillion figure is based on the Congressional Budget Office’s July 2014 Alternative Fiscal Scenario projections, which I extended beyond their 75-year horizon.

 

The journalists used a very poorly researched analysis, which fit their political bias (shocking, I know). Apparently they take that fabricated analysis more seriously than they do the views of 17 Nobel Laureates in economics and over 1200 PhD economists from MIT, Harvard, Stanford, Chicago, Berkeley, Yale, Columbia, Penn, and lesser known universities and colleges around the country. Each of these economists has endorsed The Inform Act, a bi-partisan bill that requires the CBO, GAO, and OMB to do infinite horizon fiscal gap accounting on a routine and ongoing basis.

 

Now why would 17 Nobel Laureates and over 1200 US economists, all listed by name at www.theinformact.org, including many, like Jeff Sachs, who lean to the left, and others, like Glenn Hubbard, who lean to the right, endorse infinite horizon accounting. Because they understand something that I told Michelle repeatedly and have also told Bruce Barlett repeatedly. The fiscal gap is the only measure of our fiscal position that is mathematically well-defined.

 

Every other fiscal measure, including fiscal gaps calculated over any finite horizon, such as the CBO’s 25-year fiscal gap Michelle references, are not mathematically well defined. The infinite horizon is mathematically well defined because it is the same number no matter what choice of internally consistent fiscal words we use to label government receipts and payments. Moreover, the infinite horizon fiscal gap is the only measure of our fiscal policy’s sustainability that puts everything on the books. It is also the only measure of our fiscal policy’s sustainability that is invariant to the choice of words.

 

Congress’s choice of fiscal labels determines what gets put on and what gets kept off the books. I told Michelle that her grandparents’ Social Security benefits, for which she is now paying taxes, are not on the books because the government chose to call those payments “transfers” paid in exchange for “FICA contributions” not “return of principal plus interest” paid in exchange for “purchase of government bonds.”

 

Every mathematical model of the economy’s dynamic transition path incorporates the infinite horizon fiscal gap, which is called the government’s infinite horizon intertemporal budget constraint. This constraint has to hold, which means the infinite horizon fiscal gap must be zero. Our country’s infinite horizon fiscal gap is far from zero. It would take an immediate and permanent 59 percent increase in all federal taxes or an immediate and permanent 33 cut in all federal expenditures (including official debt service) to eliminate our fiscal gap. The longer we wait to fix our fiscal system, the larger the adjustment needs to be. This means that (the journalist), and others her age, will need to pay even more for all the “assets,” including my own Medicare and Social Security benefits that have been left off the books.

 

Yes, something will have to give.

The $210 Trillion Gap

I will admit that I’m not worried about the $210 trillion in unfunded liabilities. Long before we ever get to having to fund those liabilities, the country will be in a massive crisis.

Using the CBO’s own numbers, the projected total US debt will be $30 trillion within 10 years, but the CBO also makes the rosy assumptions that there will be no recessions and that GDP will grow at a 4% nominal rate. Now, that’s possible; but I’m inclined to haircut it a bit.

If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion. After the next recession the deficit will be $30 trillion within 4–5 years and then grow from there at a rate of anywhere from $1.5 to $2 trillion per year. Note: That is not the CBO’s projected debt. It does not count the off-budget deficit that still ends up having to be borrowed. Last year the deficit was well over $1 trillion – but we were told it was in the neighborhood of $600 billion. If any normal company tried to use accounting like the US Congress does, the SEC would rightly declare it fraudulent and shut it down immediately. .

Here’s another chart from the Treasury’s annual financial report, projecting government receipts and spending:

Note that this chart expresses the various items as percentages of GDP, not dollars. So the relatively flat spending categories simply mean they are forecasted to grow in line with the economy, or just a little faster. But the space representing net interest grows much faster than GDP does – fast enough to make total federal spending add up to one-third of GDP by 2090.

Obviously, this chart is based on all kinds of assumptions, and reality will be far different. I doubt we will make it to 2090 (or even 2050) without at least one global depression or other calamity that radically resets all the assumptions. Beneficial changes are also possible – biotech breakthroughs that reduce healthcare expenditures, for instance.

Still, looking at the demographic reality of longer lifespans and lower birthrates, it’s hard to believe Social Security can survive over the long run in anything like its present form. But any major change will mean that the government is breaking its promise to workers and retirees.

Well, guess what: They backtracked on that promise decades ago. Few people noticed it at the time, and even fewer remember it now.

Tax, Not a Promise

There’s a big difference between that federal government financial statement and similar ones from private companies. “Liabilities” for a business represent contracts it has signed – the long-term lease on a building, for instance. The company agrees to pay so many dollars a month for the next 20 years. That obligation is enforceable in court. Even if the company enters bankruptcy, the court will award creditors damages from whatever assets it can recover.

The federal government doesn’t work that way. It signs contracts all the time – but often with escape clauses that private businesses could never get away with. Social Security is a good example.

Many Americans think of “their” Social Security like a contract, similar to insurance benefits or personal property. The money that comes out of our paychecks is labeled FICA, which stands for Federal Insurance Contributions Act. We paid in all those years, so it’s just our own money coming back to us.

That’s a perfectly understandable viewpoint. It’s also wrong.

A 1960 Supreme Court case, Flemming vs. Nestor, ruled that Social Security is not insurance or any other kind of property. The law obligates you to make FICA “contributions.” It does not obligate the government to give you anything back. FICA is simply a tax, like income tax or any other. The amount you pay in does figure into your benefit amount, but Congress can change that benefit any time it wishes.

Again, to make this clear: Your Social Security benefits are guaranteed under current law, but Congress reserves the right to change the law. They can give you more, or less, or nothing at all, and your only recourse is the ballot box. Medicare didn’t yet exist in 1960, but I think Flemming vs. Nestor would apply to it, too. None of us have a “right” to healthcare benefits just because we have paid Medicare taxes all our lives. We are at Washington’s mercy.

I’m not suggesting Congress is about to change anything. My point is about promises. As a moral or political matter, it’s true that Washington promised us all these things. As a legal matter, however, no such promise exists. You can’t sue the government to get what you’re owed because it doesn’t “owe” you anything.

This distinction doesn’t matter right now, but I bet it will someday. If we Baby Boomers figure out ways to stay alive longer, and younger generations don’t accelerate the production of new taxpayers, something will have to give.

If you are depending on Social Security to fund your retirement, recognize that your future is an unfunded liability – a promise that’s not really a promise because it can change at any time. 

How Will We Fund the Deficit?

And now we come to the really uncomfortable part. Notice that Larry Kotlikoff said we would need an immediate approximately 50% increase in taxes to fund our future deficits. That’s what we would need to create a true entitlements “lockbox” with the funds actually in it. But surely everybody knows by now that there is no lockbox with Social Security funds in it. That money was spent on other government programs and debts. And so when the CBO doesn’t count the trust funds as part of the national debt, they are not only being disingenuous, I think they are committing financial fraud. The money that will actually pay for Social Security and Medicare down the road is going to have to come out of future taxes, just as for any other debt of the US.

So at some point – even though Republicans are jawboning hard about cutting taxes now – we are going to have to raise taxes in order to fund Social Security and Medicare. I personally think it will have to be done with a value-added tax (VAT), because the necessary increase in income taxes would totally destroy the economy and potential growth.

(And yes, I know some of you will write back and say we had much higher tax rates in the 50s and we had good growth then, but our demographics and productivity levels were completely different in that era. Plus, nobody actually paid the highest tax levels. I remember that in the 80s, before Reagan cut the tax rate, I had so many deductions that my effective tax rate was about 15%. The irony is that after the Reagan tax cuts, my total tax payments went up, not down – I lost all of my cool deductions! Aaah, the good old days…)

But the simple fact of the matter is that no Congress is going to fund Social Security and Medicare through tax hikes. Before they ever go there, they will means-test Social Security and increase the retirement age – which they should.

Of course, Congress could always authorize the Treasury Department to authorize the Federal Reserve to monetize a certain amount of the Social Security and Medicare debt, which is essentially what Japan is doing (and seemingly getting away with it). I think we should all be grateful to the Japanese for being willing to undertake such a fascinating experiment in monetary and fiscal policy.

Let me close with a quick sidebar note. I think the Fed’s mad rush to raise rates and reduce its balance sheet at the same time is unwise. I mean, seriously, is the Federal Reserve balance sheet making that much of a difference to the US economy? Perhaps when that extraordinary balance was created, it did – but not today. This is one of those times when I think our policy makers should go slowly and tread carefully. Just saying…

http://WarMachines.com

A $210 Trillion Problem: “You May Be Hopping Mad When You Finish Reading This”

Submitted by John Mauldin of Mauldin Economics

Uncle Sam’s Unfunded Promises

Here’s a surprisingly profound question: What is a promise? Dictionaries offer various definitions. I like this one: “An express assurance on which expectation is to be based.”

That definition captures the two-sided nature of a promise. One party offers an assurance, which the other converts into an expectation. You deposit money in your checking account, and the bank assures you that you can have it back on demand. You expect that the bank will fulfill its promise when you visit an ATM.

Governments likewise make promises, but those are different. Government is the ultimate enforcer of promises, but we have no recourse if it chooses to break them – except at the ballot box. As we’ve seen in recent weeks regarding public pensions, that’s ineffective when the promises were made long ago by officials who are no longer in office.

The federal government’s keeping its promises is important for everyone in the US, because almost all of us are part of the largest public pension system: Social Security. We pay taxes our whole working lives and expect the government to give us retirement benefits. But what happens if it can’t?

Three weeks ago we visited the problems with local and state pensions. Last week we looked at European pensions. This week we are going to take a hard look at the unfunded liabilities and debt of the US government. And even though the federal unfunded pension liabilities dwarf those of state and local pensions, I want to make it clear that I believe the state and local problems will be far more intractable.

I have to warn you: You may be hopping mad when you finish reading this.

* * *

Doubled Debt

In the United States we have two national programs to care for the elderly. Social Security provides a small pension, and Medicare covers medical expenses. All workers pay taxes that supposedly fund the benefits we may someday receive. That’s actually not true, as we will see in a little bit.

Neither of these programs is comprehensive. Living on Social Security benefits alone is a pretty meager existence. Medicare has deductibles and copayments that can add up quickly. Both programs assume people have their own savings and other resources. Nevertheless, the programs are crucial to millions of retirees, many of whom work well past 65 just to keep up with their routine expenses. This chart from my friend John Burns shows the growing trend among generations to work past age 65. Having turned 68 a few days ago, I guess I’m contributing a bit to the trend:

Limited though Social Security and Medicare are, we attribute one huge benefit to them: They’re guaranteed. Uncle Sam will always pay them – he promised. And to his credit, Uncle Sam is trying hard to keep his end of the deal. In fact, he’s running up debt to do so. Actually, a massive amount of debt:

Federal debt as a percentage of GDP has almost doubled since the turn of the century. The big jump occurred during the 2007–2009 recession, but the debt has kept growing since then. That’s a consequence of both higher spending and lower GDP growth.

In theory, Social Security and Medicare don’t count here. Their funding goes into separate trust funds. But in reality, the Treasury borrows from the trust funds, so they simply hold more government debt.

The Treasury Department tracks all this, and you can read about it on their website, updated daily. Presently it looks like this:

  • Debt held by the public: $14.4 trillion
  • Intragovernmental holdings (the trust funds): $5.4 trillion
  • Total public debt: $19.8 trillion

Total GDP is roughly $19.3 trillion, so the federal debt is about equal to one full year of the entire nation’s collective economic output. In fact, it’s even more when you consider that GDP counts government spending as “production,” even when Uncle Sam spends borrowed money. Of course, that total does not count the $3 trillion-plus of state and local debt, which in almost every other country of the world is included in their national debt numbers. Including state and local debt in US figures would take our debt-to-GDP above 115%. And rising.

You can quibble over the calculations, but there’s no doubt the numbers are astronomically huge and growing. And we haven’t even mentioned the huge and growing private debt.

Just wait. We’re only getting started.

Yes, Trillions

We in the business world put a lot of faith in accountants. We trust them to count the beans honestly and give us accurate reports. We may not like the numbers (I was certainly distraught with my final tax numbers this year!), but we mostly believe them. Nothing will make a company’s stock drop faster than accounting irregularities will.

Government accounting is, well, different. The government doesn’t need to make a profit, but we expect it to spend our tax money wisely and to deliver services efficiently. That’s not possible unless there is reliable accounting. But reliable accounting is the last thing most politicians want – it constrains them from promising things they can’t deliver. So we have to take all government numbers with many grains of salt.

However, there is one chink in the politicians’ armor. An old statute requires the Treasury to issue an annual financial statement, similar to a corporation’s annual report. The FY 2016 edition is 274 enlightening pages that the government hopes none of us will read.

Among the many tidbits, it contains a table on page 63 that reveals the net present value of the US government’s 75-year future liability for Social Security and Medicare. That amount exceeds the net present value of the tax revenue designated to pay those benefits by $46.7 trillion. Yes, trillions.

Where will this $46.7 trillion come from? We don’t know. Future Congresses will have to find it somewhere. This is the fabled “unfunded liability” you hear about from deficit hawks. Similar promises exist to military and civil service retirees and assorted smaller groups, too. Trying to add them up quickly becomes an exercise in absurdity. They are so huge that it’s hard to believe the government will pay them, promises or not.

Now, I know this is going to come as a shock, but that $46.7 trillion of unfunded liabilities is pretty much a lie. My friend Professor Larry Kotlikoff estimates the unfunded liabilities to be closer to $210 trillion. When presidential candidate Ben Carson last year quoted Kotlikoff’s numbers, the Washington Post, New York Times, and other mainstream media immediately attacked him. Of course, the journalists doing the attacking had agendas, and none of them were economists or accountants. None. Zero. Zip.

Larry responded in an article in Forbes, since Carson was using his data:

The fiscal gap is the present value of all projected future expenditures less the present value of all projected future taxes. The fiscal gap is calculated over the infinite horizon. But since future expenditures and taxes far off in the future are being discounted, their contribution to the fiscal gap is smaller the farther out one goes. The $210 trillion figure is based on the Congressional Budget Office’s July 2014 Alternative Fiscal Scenario projections, which I extended beyond their 75-year horizon.

 

The journalists used a very poorly researched analysis, which fit their political bias (shocking, I know). Apparently they take that fabricated analysis more seriously than they do the views of 17 Nobel Laureates in economics and over 1200 PhD economists from MIT, Harvard, Stanford, Chicago, Berkeley, Yale, Columbia, Penn, and lesser known universities and colleges around the country. Each of these economists has endorsed The Inform Act, a bi-partisan bill that requires the CBO, GAO, and OMB to do infinite horizon fiscal gap accounting on a routine and ongoing basis.

 

Now why would 17 Nobel Laureates and over 1200 US economists, all listed by name at www.theinformact.org, including many, like Jeff Sachs, who lean to the left, and others, like Glenn Hubbard, who lean to the right, endorse infinite horizon accounting. Because they understand something that I told Michelle repeatedly and have also told Bruce Barlett repeatedly. The fiscal gap is the only measure of our fiscal position that is mathematically well-defined.

 

Every other fiscal measure, including fiscal gaps calculated over any finite horizon, such as the CBO’s 25-year fiscal gap Michelle references, are not mathematically well defined. The infinite horizon is mathematically well defined because it is the same number no matter what choice of internally consistent fiscal words we use to label government receipts and payments. Moreover, the infinite horizon fiscal gap is the only measure of our fiscal policy’s sustainability that puts everything on the books. It is also the only measure of our fiscal policy’s sustainability that is invariant to the choice of words.

 

Congress’s choice of fiscal labels determines what gets put on and what gets kept off the books. I told Michelle that her grandparents’ Social Security benefits, for which she is now paying taxes, are not on the books because the government chose to call those payments “transfers” paid in exchange for “FICA contributions” not “return of principal plus interest” paid in exchange for “purchase of government bonds.”

 

Every mathematical model of the economy’s dynamic transition path incorporates the infinite horizon fiscal gap, which is called the government’s infinite horizon intertemporal budget constraint. This constraint has to hold, which means the infinite horizon fiscal gap must be zero. Our country’s infinite horizon fiscal gap is far from zero. It would take an immediate and permanent 59 percent increase in all federal taxes or an immediate and permanent 33 cut in all federal expenditures (including official debt service) to eliminate our fiscal gap. The longer we wait to fix our fiscal system, the larger the adjustment needs to be. This means that (the journalist), and others her age, will need to pay even more for all the “assets,” including my own Medicare and Social Security benefits that have been left off the books.

 

Yes, something will have to give.

The $210 Trillion Gap

I will admit that I’m not worried about the $210 trillion in unfunded liabilities. Long before we ever get to having to fund those liabilities, the country will be in a massive crisis.

Using the CBO’s own numbers, the projected total US debt will be $30 trillion within 10 years, but the CBO also makes the rosy assumptions that there will be no recessions and that GDP will grow at a 4% nominal rate. Now, that’s possible; but I’m inclined to haircut it a bit.

If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion. After the next recession the deficit will be $30 trillion within 4–5 years and then grow from there at a rate of anywhere from $1.5 to $2 trillion per year. Note: That is not the CBO’s projected debt. It does not count the off-budget deficit that still ends up having to be borrowed. Last year the deficit was well over $1 trillion – but we were told it was in the neighborhood of $600 billion. If any normal company tried to use accounting like the US Congress does, the SEC would rightly declare it fraudulent and shut it down immediately. .

Here’s another chart from the Treasury’s annual financial report, projecting government receipts and spending:

Note that this chart expresses the various items as percentages of GDP, not dollars. So the relatively flat spending categories simply mean they are forecasted to grow in line with the economy, or just a little faster. But the space representing net interest grows much faster than GDP does – fast enough to make total federal spending add up to one-third of GDP by 2090.

Obviously, this chart is based on all kinds of assumptions, and reality will be far different. I doubt we will make it to 2090 (or even 2050) without at least one global depression or other calamity that radically resets all the assumptions. Beneficial changes are also possible – biotech breakthroughs that reduce healthcare expenditures, for instance.

Still, looking at the demographic reality of longer lifespans and lower birthrates, it’s hard to believe Social Security can survive over the long run in anything like its present form. But any major change will mean that the government is breaking its promise to workers and retirees.

Well, guess what: They backtracked on that promise decades ago. Few people noticed it at the time, and even fewer remember it now.

Tax, Not a Promise

There’s a big difference between that federal government financial statement and similar ones from private companies. “Liabilities” for a business represent contracts it has signed – the long-term lease on a building, for instance. The company agrees to pay so many dollars a month for the next 20 years. That obligation is enforceable in court. Even if the company enters bankruptcy, the court will award creditors damages from whatever assets it can recover.

The federal government doesn’t work that way. It signs contracts all the time – but often with escape clauses that private businesses could never get away with. Social Security is a good example.

Many Americans think of “their” Social Security like a contract, similar to insurance benefits or personal property. The money that comes out of our paychecks is labeled FICA, which stands for Federal Insurance Contributions Act. We paid in all those years, so it’s just our own money coming back to us.

That’s a perfectly understandable viewpoint. It’s also wrong.

A 1960 Supreme Court case, Flemming vs. Nestor, ruled that Social Security is not insurance or any other kind of property. The law obligates you to make FICA “contributions.” It does not obligate the government to give you anything back. FICA is simply a tax, like income tax or any other. The amount you pay in does figure into your benefit amount, but Congress can change that benefit any time it wishes.

Again, to make this clear: Your Social Security benefits are guaranteed under current law, but Congress reserves the right to change the law. They can give you more, or less, or nothing at all, and your only recourse is the ballot box. Medicare didn’t yet exist in 1960, but I think Flemming vs. Nestor would apply to it, too. None of us have a “right” to healthcare benefits just because we have paid Medicare taxes all our lives. We are at Washington’s mercy.

I’m not suggesting Congress is about to change anything. My point is about promises. As a moral or political matter, it’s true that Washington promised us all these things. As a legal matter, however, no such promise exists. You can’t sue the government to get what you’re owed because it doesn’t “owe” you anything.

This distinction doesn’t matter right now, but I bet it will someday. If we Baby Boomers figure out ways to stay alive longer, and younger generations don’t accelerate the production of new taxpayers, something will have to give.

If you are depending on Social Security to fund your retirement, recognize that your future is an unfunded liability – a promise that’s not really a promise because it can change at any time. 

How Will We Fund the Deficit?

And now we come to the really uncomfortable part. Notice that Larry Kotlikoff said we would need an immediate approximately 50% increase in taxes to fund our future deficits. That’s what we would need to create a true entitlements “lockbox” with the funds actually in it. But surely everybody knows by now that there is no lockbox with Social Security funds in it. That money was spent on other government programs and debts. And so when the CBO doesn’t count the trust funds as part of the national debt, they are not only being disingenuous, I think they are committing financial fraud. The money that will actually pay for Social Security and Medicare down the road is going to have to come out of future taxes, just as for any other debt of the US.

So at some point – even though Republicans are jawboning hard about cutting taxes now – we are going to have to raise taxes in order to fund Social Security and Medicare. I personally think it will have to be done with a value-added tax (VAT), because the necessary increase in income taxes would totally destroy the economy and potential growth.

(And yes, I know some of you will write back and say we had much higher tax rates in the 50s and we had good growth then, but our demographics and productivity levels were completely different in that era. Plus, nobody actually paid the highest tax levels. I remember that in the 80s, before Reagan cut the tax rate, I had so many deductions that my effective tax rate was about 15%. The irony is that after the Reagan tax cuts, my total tax payments went up, not down – I lost all of my cool deductions! Aaah, the good old days…)

But the simple fact of the matter is that no Congress is going to fund Social Security and Medicare through tax hikes. Before they ever go there, they will means-test Social Security and increase the retirement age – which they should.

Of course, Congress could always authorize the Treasury Department to authorize the Federal Reserve to monetize a certain amount of the Social Security and Medicare debt, which is essentially what Japan is doing (and seemingly getting away with it). I think we should all be grateful to the Japanese for being willing to undertake such a fascinating experiment in monetary and fiscal policy.

Let me close with a quick sidebar note. I think the Fed’s mad rush to raise rates and reduce its balance sheet at the same time is unwise. I mean, seriously, is the Federal Reserve balance sheet making that much of a difference to the US economy? Perhaps when that extraordinary balance was created, it did – but not today. This is one of those times when I think our policy makers should go slowly and tread carefully. Just saying…

http://WarMachines.com