The Independent Investor: Does Our Debt Really Matter?
The country's national debt hovers at historically record highs, as the nation's budget battle begins. It's a pretty safe bet to expect another budget-busting compromise as well as a hefty increase to our already-overwhelming debt load.
At times like this I wonder whether Americans are facing the prospect that someday the United States could be the world's largest impoverished nation, and if so, does it really matter?
Last week's column examined the subject of debt, both private and domestic, and how large it has become. This week, I begin by asking why debt matters at all? On a personal level, we know the answer, but what about the nation?
Debt has been a popular whipping boy for economists and politicians in this country for decades. At times, one or the other political party has found it expedient to become a champion of economic sobriety. Of course, once they recapture control of the government purse strings, they pretend amnesia.
The Republicans, for example, spent eight years fighting the Democrats under President Obama on every dollar of proposed spending, except defense. Their argument back then was that any spending would increase the public debt and make it impossible to balance the budget. Republicans even refused to approve funding for our national debt limit and actually shut down the government in defense of what they called fiscal responsibility.
Fast forward to 2016-2018, when the same party (and the exact same politicians) added more debt to the country than at any time in our history, while throwing the budget into the red by trillions of dollars. The president's recent budget proposal only adds more fuel to our fiscal fire.
According to the Office of Management and Budget (OMB), debt under the President's budget would rise from 77 percent of Gross Domestic Product (GDP) in 2017 to 82 percent in 2022 before falling to 73 percent of GDP by 2028. OMB also projects the deficit will rise from 3.5 percent of GDP ($665 billion) in 2017 to 4.7 percent of GDP ($984 billion) by 2019, and then decline to 1.1 percent of GDP ($363 billion) by 2028.
Given that the supposed "fiscally conservative party" has thrown in the towel on spending and debt, is it too much to hope that the liberals (read Democrats) might have a sudden attack of conscience and discover fiscal responsibility? Don't hold your breath.
In fact, over the past few weeks, Modern Monetary Theory (MMT) has once again caught the attention of certain politicians in Congress and on the 2020 campaign trail. What exactly is MMT?
It is an old economic idea that periodically comes to the forefront and has, from time to time, attracted the attention of mostly liberal politicians. It does so, in my opinion, because some of its tenets fit their vision of what government and the economy should be all about.
In essence, MMT argues that if you have borrowed money (increased your debt) in your domestic currency (in this case the dollar), which is the currency that you as a government create, then you can always pay back your claims. How? By simply printing more money. Sounds simple, right?
The problem is that the United States, or any other country, does not exist in a vacuum. For every action, there is a reaction There are ramifications for piling on more and more debt and printing vast mountains of money to pay for it. The Weimar Republic tried that back before WWII, and so did Zimbabwe less than a decade ago. It resulted in hyperinflation, destitution and political unrest.
Nonetheless, if you believe government has the right and the responsibility to provide health care for all, or full employment through a federally-mandated jobs program, or any other big government spending program, then MMT has some appealing features. The MMT proponents argue that the country's central bank would be the locomotive for such programs by simply printing more money, and raising more debt, which, in turn, would finance such programs.
If, as critics argue, that causes our debt to skyrocket and inflation to explode upward someday, then it would be up to Congress to deal with it by raising taxes (to pay down debt), while tightening fiscal policy (to put a lid on inflation by slowing the economy). It would, in essence, turn our economic and financial world upside down, while leaving it to the politicians to make the hard, politically unpopular choices when necessary. Raise your hand if you would have confidence in such a system.
MMT, which has never been proven, nor completely understood as an economic theory, continues to look for a home among politicians and others. It is now being used in some quarters as economic justification for the financial expansion of a new welfare state. Does that surprise you?
In a country where partisan politics, extreme income inequality, and increasingly radical attitudes and ideas (fostered and fueled by our elected officials) are in every headline and tweet, is it any wonder that ideas like this would find increased backing by a polarized society?
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@theMarket: Pick Your Poison
Investors were greeted on Friday with two nasty surprises. Both occurred in February. Chinese exports dropped by 20.7 percent, while in the U.S., the nation added a dismal 20,000 jobs. As you might expect, the stock market did not take the news well.
What really spooked traders was how far apart these numbers were to expectations. Over here, we were expecting 180,000 jobs to be added to the payroll number. In China, where the economy had been expected to weaken, exports had been forecasted to decline by 6 percent, versus the prior year.
Before the ink had dried on the jobs data, the administration was already sending their point man on the economy, Larry Kudlow, the director of the National Economic Council, on television to assure Wall Street that the February data was "fluky" and should be ignored.
As for China, investors there took the Shanghai Composite down by 4.4 percent overnight. Japan dropped half of that (minus-2 percent), even after the government said its economy grew by 1.9 percent in the fourth quarter of last year. It also didn't help that the European Central Bank lowered its forecasts Thursday for growth in the Eurozone and announced more stimulus measures to support the economy.
Over the last two weeks, I have been warning readers to expect a pullback in the markets, nothing too serious, but maybe a 3-5 percent decline. If I were to take a guess, we could see the S&P 500 Index hit 2,700 or so, before we mellow out. From there, it depends on how low those crazy algo trading machines decide to take us. Where is John Connor when you need him?
By now you should expect these consolidations especially after watching the indices free fall in the last quarter of 2018 and then climb by almost 20 percent from their December lows.
There has also been a growing skepticism over the China/U.S. trade deal. Despite my own skepticism, investors were happy to drink the White House "Kool-Aid" on the timing of a breakthrough announcement. It was first thought the deal would be announced three weeks ago. It was then pushed back after the Chinese team of negotiators returned to Beijing with nothing done. Last week, negotiations were "moving along very nicely," according to the president.
On Thursday, The New York Times reported that negotiators were still trying to lock down details and that Chinese officials "were wary about the final terms" because of Trump's penchant for making last-minute changes over the heads of his negotiators. But, of course, they would say that.
On Friday, Trump, when asked about the deal on the South Lawn, sounded a little less certain. He predicted "a very big spike" in the stock market "as soon as these trade deals are done, if they get done, and we're working with China. We'll see what happens."
Whether we actually do see a spike in the stock market (and for how long) depends on what happens next. Readers might recall that I believed that much of any potential upside for stocks based on a breakthrough trade deal was already discounted by market participants. When announced, it would likely be a "sell on the news" event.
If, on the other hand, the markets continue to pullback here by several percent, and then a really good deal is announced (as opposed to something which simply saves face), then the president might be right. So how do you play it? Simple: do nothing, stay invested, and strap in. The ride should be bumpy.
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The Independent Investor: A Nation United in Debt
About a month ago, the national debt topped $22 trillion for the first time. What's more, it only took a year to tack on another $1 trillion. Unless we do something soon, we could see those kinds of yearly borrowing double within the next decade.
Let's define U.S. debt as the sum of all outstanding debt owed by the federal government. Two-thirds of this debt is held by you and me. It is called public debt, while one-third is held by various inter-governmental departments and agencies such as Social Security and other trust funds.
We have the distinction of being the world's largest debtor, although the European Union is a close second. We now have more debt on our books than we produce in goods and services in a year. If you and I were in the same boat (and most of us are), we might have a problem repaying that debt in the future. If interest rates begin to rise, we might need to cut back on our spending just to make the monthly payments. As you might imagine, your debt and the government's have a lot in common.
Using the nation's debt practices as our model, we find that more and more Americans are accumulating debt. And, what's more, we are dying with that debt on our books. About 73 percent of Americans who die have unpaid debt that totals much more than their funeral expenses, according to Experian PLC, a large credit card reporting bureau; the average amount of that debt is about $62,000.
As you might expect, unpaid mortgages account for 37 percent of those liabilities, followed by student loans (in many cases), while credit card debt is relatively small (after personal and auto loans). But if you ask the typical American if they believe they will be in debt their entire lives, only 30 percent would answer in the affirmative.
And like the nation, there are common threads between the causes of our personal debt and that of the nation. Most of us borrow when we have nowhere else to go in order to make ends meet. God forbid we stop spending. In the case of the nation, we borrow when the economy gets into trouble and keep borrowing until things are good again.
Historically, the largest percentage increase in our debt occurred under President Franklin Delano Roosevelt back in the 1930s and '40s to combat the Great Depression and the onset of World War II. It was President Obama who ran up the largest deficit dollar-wise in our history (in order to deal with the Financial Crisis). His predecessor, George W. Bush, came in second. Bush's spending can also be attributed to the Financial Crisis since it was his administration that spawned and presided over that calamity.
A second cause of our government indebtedness has been our borrowing from the Social Security Trust Fund. The politicians have been using the revenue from that fund to spend more and more for decades. To them, it has functioned as an interest-free loan, although at some point (2035) that situation is going to reverse, and those borrowings will have to be paid back to retirees.
Personally, many of us do the same thing with our credit cards. Many of us look at it as free money, although our borrowings are by no means interest-free, which ultimately ends up in so many of us going bankrupt.
America also has its equivalent credit lenders. China and Japan, for example, have been happy to lend to us, so we can keep buying their exports year after year. And like credit card companies, they will be receiving more and more interest in return for their loans to us. And like consumers, at some point, we could end up never paying off more than the monthly payments. Where will that stop? Unlike us, the federal government can always vote to raise the debt ceiling and borrow more and more, while if we borrow too much our credit is curtailed.
None of this should be news to readers. You hear about the out-of-control national debt all the time. But If you are anything like me, when economists throw around numbers like one and two trillion dollars, I lose interest. I simply can't wrap my head around figures that large.
As such, is it any wonder that there is a growing movement of ultra-liberal legislators who argue that we can continue to borrow as a nation like this, no matter how high the debt goes? It's "all-good," they say, as long as we can continue meeting our monthly payments, while keeping economic growth moderately strong and inflation low. Unfortunately, that is a pipe dream, in my opinion, and in my next column, I will tell you why.
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@theMarket: Stocks on Hold
February delivered good gains for the markets. All the main averages were up, continuing January's climb toward the old highs. This week, momentum stalled a bit, indicating that investors need more good news to continue buying.
A China trade agreement (or lack thereof) still takes center stage. Despite the Washington, D.C., circus surrounding the testimony of Michael Cohen, the president's chief "fixer" for over a decade, traders largely ignored the hype.
At the same time (no accident in the scheduling), President Donald Trump hoped to take the spotlight off Cohen and back on him by meeting with Kim Jung-un in Hanoi for a second summit. Unfortunately, that meeting was such a bust that Trump left early without any progress at all. One wonders if the whole trip was just a publicity stunt to draw attention away from the Cohen testimony before Congress. Traders ignored that event as well.
What really kept the lid on the market was U.S. Trade representative John Lighthizer's comments before the House Ways and Means Committee on Wednesday. "Let me be clear," Lighthizer said, "Much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached."
The trade rep went on to say that China needed to do more than just buy more of our trade goods, citing all the other concerns such as technology transfers and intellectual property theft.
None of the above should be new to my readers, since it is something I have been talking about for months. However, this dose of reality flies in the face of all the hype and hope that propelled the market averages to where they are today. And it has not been only our market that was bid up by the tweets and off-hand comments of the president in the last few weeks.
China saw its equity market gain 5 percent overnight earlier in the week, after gaining almost as much last week. Since then, the Shanghai averages have come back down to earth. They have given up a good amount of those gains. Here in the U.S., the averages are still hanging in there and finished the week up modestly.
Almost like clockwork, Larry Kudlow, the president's chief economic advisor, tried to talk the markets and the trade-deal prospects back up on Thursday morning. He has done this good cop/bad cop routine before and after comments by Lighthizer. After an initial flurry of algo-driven buys, the rally petered out. However, on Friday, after investors digested a better than expected 2018 fourth quarter GDP number of 2.6 percent, the markets were encouraged and finished up for the week.
But it remains the job of the maestro to reassure the markets if we hope to break out of this tight trading range on the S&P 500 Index. At this point, Trump and Trump alone can dispense the hope and Beetle Juice necessary to keep the markets climbing. It is no secret that the averages are overbought, extended, and due for a pullback of sorts. The "pain trade" this week was to short the markets anticipating that decline, which did not occur. As we enter a new month, there is an even chance that, instead of a decline, we continue this sideways action or, (if there is a breakthrough on trade), the potential to move even higher.
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The Independent Investor: Veterans on Receiving End of Trump Administration
In the 2019 fiscal budget, the Department of Veterans Affairs received more than $200 billion in spending. That's a 6 percent increase over last year and counts as the largest amount ever received by the VA. The money will go a long way in implementing an array of much-needed reforms.
There will be $400 million earmarked for preventing opioid abuse. As you might imagine, veterans are a high-risk group since opioids are used extensively in treating wartime casualties.
An additional $1.1 billion will jump-start the overhaul of the VA's electronic health records, while $1.75 billion will go to implementing the VA Mission Act. That money will revamp and re-write the veteran's community care programs, which allows for an entire array of new health care choices for the veteran. This will boost the vet's ability to access private health care at taxpayers' expenses.
On the education front, the Veterans Benefits and Transition Act will help to right some past wrongs inflicted on Post-9/11 GI bill users. Last year, there was a series of technology glitches at the Department of Veterans Affairs that resulted in delayed and inaccurate payments for many thousands of vets attending college.
In many cases, the government was not paying the tuition costs, or if they were, the payments were delayed. GI students were being hit from all sides. Schools were charging them late fees, preventing them from access to campus facilities, or were not allowing them to register for their next semester.
As vets scrambled to pay the tuition shortfalls, money for mortgage and rents were in short supply causing even more late fees to accrue. Some schools were urging veterans to take out loans to cover future tuition costs. It was a mess. The new act puts an end to these practices and demands that schools cease and desist if they want to continue to enroll students who are using the GI Bill.
As for the late payments the vets incurred, the new Forever GI Bill Housing Payment Fulfillment Act is holding the VA accountable for fixing these past payment snafus. The act creates a team of experts to oversee these reimbursements and report back to Congress on their progress every 90 days.
There are many more initiatives, from helping homeless vets to finding jobs to transitioning returning soldiers into civilian life, but you get the point. As for me personally, until recently, I stayed well clear of the VA. The harrowing stories I read and heard about the bureaucracy, slovenly and overcrowded facilities and atrocious health-care services kept me far away from seeking their help.
However, times are changing and so has my attitude of late. There is some talk of actually turning over the health care of veterans to the private sector if things don't improve within the VA. I decided to experiment and visit my local VA medical center for a physical.
I was blown away by the level of competence and professionalism I encountered. From the doctor who examined me, Dr. John Hickey at the Pittsfield Outpatient Clinic, to the nurse who took my blood pressure, to the receptionist, and everyone in between, the service and care was equivalent to, if not better than anything I have experienced in the private sector.
My appointments were sent via phone and messaging. My health records are securely stored, new information is automatically updated in their electronic systems and my next appointment scheduled and recorded. And it is not just the VA Medical Center. My local VA representative returns phone calls within a day and answers emails within hours. In my opinion, there is a new "can do" attitude from top to bottom in the VA.
So, it is time to give credit where credit is due. Helping the veterans was one of the president's campaign promises. Bravo, Mr. President for a job well done. Keep up the good work.
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