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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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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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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The Independent Investor: Economic Prosperity in the United States
The stock market is once again approaching historical highs. Unemployment is at multi-year lows. Interest rates and inflation, if not at record lows, are close to it. The president claims we are enjoying the strongest economy in our nation's history. Is that true?
The short answer, according to a recent study by Bloomberg, would be no, not even close. They went back over the course of the last 43 years and measured the nation's economy under three Democratic and four Republican presidents. They found that in all but one case both the economic and financial performance of the U.S. was better than it is now.
Bloomberg used 14 different gauges to measure a wide range of economic activity.
Everything, from manufacturing jobs to the value of the greenback versus other currencies, was included. All the traditional variables such as GDP, unemployment, wages productivity, etc., were also analyzed.
It turns out that the economy under the last seven presidents saw the greatest improvement under President Bill Clinton between 1993 to 2001. Ranking No. 2 was Barack Obama. President Obama, readers may recall, took office in 2009 during the worst recession since the 1930s. By the time he departed in 2017, he handed Donald Trump an economy that saw the second-best performance of all seven presidents.
Ronald Reagan only ranked No. 3, followed by George H.W. Bush, Jimmy Carter then George W. Bush (who presided over the largest financial crisis in 80 years). President Trump settles in at the No. 6 place, not quite as bad as George W., but clearly lagging Jimmy Carter.
Even though it is early days, with a little less than two years left in his presidency, Trump's economy is below average in 12 of the 14 measures. He can claim the lowest unemployment rate since the 1960s, however, and the strongest growth in manufacturing jobs since 1997.
From a politically partisan point of view, Trump's sixth-place score would leave you wondering why he claims he is responsible for "the strongest economy in the history of our nation." But this has happened before. Just about every president claims credit for a good economy. They might as well, since bad economies are always blamed on them as well no matter the facts. And the fact is that presidents have little to do with the state of the economy.
All economies run in cycles. Recessions occur from a variety of factors both here and abroad. Central bank policies have much more to do with how the economy fairs at any given time than the election of a president. Presidents will always be one small piece of the public policy picture. And public policy is only a tiny piece of the forces that buffer, change, and mold today's complex economies.
The internet boom that coincided with the Clinton years had its origins decades before Clinton was ever elected. The Financial Crisis of the Bush era can be partially traced to President Clinton's jettisoning of the Glass-Steagall Act. Oil booms and busts, geopolitical turmoil and so much more are a result of policies by ours and other governments dating back to as early as World War II.
Why should a president get blamed (or take credit) for where the economy is at a certain stage when the seeds of growth or decline were planted long before he took office? Nonetheless, when 2020 rolls around, the same old myths will resurface, and voters will once again vote a president in or out based on what the economy is doing at that moment. That's the world we live in.
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The Independent Investor: Trump's War on Drug (Prices)
For the second year in a row, President Donald Trump called on Congress to do something about the escalating drug prices in America. The president is doggedly pursuing this campaign promise in the face of an army of special interest groups and big drug companies. Hurrah for you, Mr. President.
In his State of the Union address he said:
He wants our legislators to "deliver fairness and price transparency for American patients. We should also require drug companies, insurance companies, and hospitals to disclose real prices to foster competition and bring down costs."
Given that drug pricing is a complicated area and there have been various proposals and recommendations proposed, I will focus on just a few at a time. One of the president's proposed actions would reduce drug prices by allowing pharmaceutical companies to offer discounted prices to Medicare and Medicaid directly, bypassing the middlemen, called pharmacy benefit managers (or PBMs). Historically, these PBMs have been useful to insurance companies and large employers. They make their money by negotiating behind-the-scenes deals with Big Pharma acquiring discounts, called "rebates," for their big clients on certain "approved" prescription drugs.
These rebates are targeted to name-brand drugs that are covered by Medicare and Medicaid. Since this is a well-known system of back-scratching, drug companies simply hike prices high enough each year to cover these "rebates." This year, for example, despite the president's call to hold down prices, 60 drug companies increased prices on more than 300 products, and we are only in February of the new year.
Trump wants these discounts, instead, to flow directly to the consumer at the pharmacy counter, rather than the pockets of the PBMs. Since drugs paid through the Medicare system account for 30 percent or more of the country's retail drug spending, this would result in a sea of change to the prescription drug market.
This change would especially benefit those of us with really high prescription drug costs. The rebate system, you see, is usually focused on competitive drugs, such as two opposing blood pressure medicines. The really expensive drugs usually have no competition and therefore fall out of the rebate system.
I have a client, for example, with a fairly rare condition, who pays well over $100,000 a year for one drug. Under the current system, his deductible and co-insurance are sky high, because there are no rebates available to him. He pays the list price for his medication and is required to pay a percentage of the drug's cost himself. He could save as much as 30 percent on his drug costs.
For many of us, however, there would be a downside. Since insurers would no longer be able to apply the rebate money, they receive from PBMs to lower overall insurance premiums, the typical Medicare patient could see premiums go up by as much as $5 or more a month. Some experts think that about one-third of Medicare drug plans will benefit from the change, while two-thirds may not.
Another group to benefit would be those who suffer from the "doughnut hole" In Medicare Part D, which covers drug cost. These expenses can escalate until they reach what is called the "catastrophic phase" where out-of-pocket expenses tops $5,100. At that level, the government steps in and will assist in paying most of the bill. Lowering drug costs will reduce prices and provide some relief to we who suffer from the prescription donut hole on a yearly basis.
Although the Democrats have identified drug pricing as an area they would also like to attack, their solutions differ. In an almost knee-jerk fashion in today's partisan politics, anything one side proposes is immediately shot down by the other side.
"The Trump administration's rebate proposal puts the majority of Medicare beneficiaries at risk of higher premiums and total out-of-pocket costs and puts the American taxpayer on the hook for hundreds of billions of dollars," says Nancy Pelosi, the Democrat's speaker of the House.
It remains to be seen if the Democrats can come up with something better. In the meantime, one proposal I thought made a lot of sense was Trump's proposed change to Medicare B pricing. He wants a much larger set of drugs to be priced no higher than they are in foreign countries like Japan or nations in Europe. He also proposed that the secretary of Housing and Human Services (HHS) be allowed to negotiate prices and permit U.S. residents to purchase medicines directly from other countries.
Despite the partisan rhetoric, there seems to be some willingness to work together. Given the president's lead on drug pricing, I believe it is one area where we could see Congress and the White House come to terms and pass something useful and acceptable for all of us. Wouldn't that be great?
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