Tag Archives: debt

Fixing the Student Loan Debt Crisis and Reforming Edcuation

From Demos: Why Education Does Not Fix Poverty

The author lists some reasons why poverty has not fallen in spite of the US population becoming more educated:

First, handing out more high school and college diplomas doesn’t magically create more good-paying jobs. When more credentials are chasing the same number of decent jobs, what you get is credential inflation: jobs that used to require a high school degree now require a college degree; jobs that used to require an Associate degee now require a Bachelor’s degreee; and so on. Obviously the supply of good-paying jobs is not a fixed constant of nature, but there is no reason to think that the supply will automatically go up to match the number of people with the necessary credentials. The types of jobs available in a society, and their level of compensation, is determined by many factors (demand, worker power, technology, global competition, natural resources, etc.) that have little to do with the number of degrees that society is minting.

This is compounded by the fact that even after adjusting for inflation, student loan debt is surging:

Student loan debt exceeds credit card debt:

And to add insult to injury, the rate of debt exceeds gains in wages. Debt is up 35% and median annual wages are flat:

Too much debt compounded by poor job prospects – a bad combination. Regarding debt, the system is broken, and the very people who are trying to ‘save’ the poor with ‘good intentions’ are making things worse, by continuing the college/debt cycle in perpetuity. A better solution is to replace costly, time-consuming diplomas with cheap, easy to administer IQ-like tests like the Wonderlic, as well as the SAT, which is also a good proxy for IQ and signaling competence and learning ability. Yeah, there is disparate impact, I know, but these tests would save a lot of time and money, sparing millions of students, particularly low-income students, of decades of debt. Employers want employees who can learn quickly, make inferences, adjust to changes, and anticipate needs – all skills linked to IQ.

Regarding the mismatch of skills and unemployment, another problem is that we’re perhaps in an era of ‘peak school‘, and instead of more education for the sake of education, we need ‘targeted education’ to teach young people the skills employers are directly seeking, sorta like vocational schools. More intelligent students can either undergo a comprehensive formal, liberal arts education or learn high-paying skills like coding while in high school instead of spending tens of thousands of dollars or more to learn it in college and frittering many valuable years. Britain has a program similar to this, Eleven-Plus exam, as I explain in an earlier post Birth ‘Lottery’ Does Not Preclude Meritocracy:

The politically correct approach to education of trying to bring everyone to the same level is flawed; we need to use cognitive screening to ascertain individuals’ strengths and weaknesses, and then create curriculum optimized around this. Beyond the basics like reading and math, higher IQ kids, for example, should be encouraged to learn high-paying skills like STEM at an early age, as well as pursuing other cognitive creative endeavors; lower-IQ kids should learn service work since that’s where the most opportunities, if there any, will be. Britain had a system similar to this, the Eleven Plus exam, which tested kids at the age of 10 for future educational placement, with lower-IQ kids learning vocational work, average-IQ kids continuing with their education, and high-IQ kids going to special schools.

And from Scott Adams How to Get a Real Education:

I understand why the top students in America study physics, chemistry, calculus and classic literature. The kids in this brainy group are the future professors, scientists, thinkers and engineers who will propel civilization forward. But why do we make B students sit through these same classes? That’s like trying to train your cat to do your taxes—a waste of time and money. Wouldn’t it make more sense to teach B students something useful, like entrepreneurship?

He’s right. What we have is a misapplication of resources and ability. Rather then a cold dose of reality that, no, Jimmy with an IQ of 90 should not go to college, teachers would rather (or at least they are forced to) lie to parents and students, sending them down a path of debt that is worsened by a high college dropout rate.

Related:

IQ and SAT Scores as a Solution to the Student Loan Crisis
Breaking the Tuition Feedback Loop
Disparate Impact Litigation Hurts Job Seekers, Students, and Employers
Some Ideas to Reform Higher Education
The Student Loan Charade
An Indebted Generation

Donald Trump Wrong About Treasury Bonds

Even though Josh Brown of the Reformed Broker leans ‘left’, I agree stiffing treasury bond holders, hurting America’s credit worthiness and causing a multitude of problems in the process, is a bad idea:

The whole world runs on the premise that US debt is risk-free in terms of return of principal, backed up by our status as the world’s reserve currency and the enforcement of the US Navy, Army, Air Force and Marine Corps. You can mess with just about anything else you want, but you can’t mess with that. Ted Cruz tried in 2011 2013 and we should have deported him on the spot. This is a no-go zone for dilettantes and ideologues.

Trump’s solution would cause far more problems than it would solve, similar to those who opposed the bank bailouts in 2008, which would have made things worse had the bailouts not happened.

Rather than defaulting on the debt, a better solution is to cut entitlement spending, including healthcare spending.

Trump needs to understand the the economy and debt holders should not be pawns in an ideological war. Leave them out of it.

Collapse Can Wait, Part 2

Aaron is right about America’s reserve currency status, and also there is the petrodollar in addition to the ‘flight to safety’ and other factors that are keeping interest rates low and the dollar high, all thanks to American exceptionalism. As bad as the US economy may seem, other countries are worse, although I am more optimistic about America’s economic prospects than many on the ‘alt right’.

Economically, America is like the smartest kid in special ed.

I’ve discussed the debt situation earlier here and here. It’s not as bad as it may seem.

However, the treasury prints money, not the fed. QE is not the same as debt monetization. This is distinction explains why the money supply has not increased in spite of QE.

The story here couldn’t be more self explanatory. The US M2 money supply is simply not expanding anywhere close to its historical rate.

As you can see, the growth of the M2 money supply is still inline with historical trends:

This explains why inflation as measured by CPI is still very low. Another reason for low inflation is that the money velocity is still very low:

Loan activity is stagnant. Monetary policy can be likened to taking a bunch of money, sticking it in a safe, and melting the key. Monetary policy seems to be more psychological (as a way to boost confidence) than to alter the structure of the economy itself.

The reasoning is simple – the money multiplier is a myth. So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves. It doesn’t result in more apple sales (loans). Banks are never reserve constrained. The explosion in reserves and continuing decline in loans makes this crystal clear. The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.

QE is just another tool in the fed’s toolbox to lower interest rates on the longer-duration of the yield curve after conventional monetary policy has been tried.

Pensions funds are playing a larger role, which is why it’s not such a big deal that China is dumping US debt:

For all the dire warnings over China’s retreat from U.S. government debt, there’s one simple fact that is being overlooked: American demand is as robust as ever.

Not only are domestic mutual funds buying record amounts of Treasuries at auctions this year, U.S. investors are also increasing their share of the $12.9 trillion market for the first time since 2012, data compiled by Bloomberg show.

American funds have purchased 42 percent of the $1.6 trillion of notes and bonds sold at auctions this year, the highest since the Treasury department began breaking out the data five years ago. As recently as 2011, they bought as little as 18 percent.

There is so much demand for low yielding, safe US debt that the bigger concern is deflation, not inflation.

Aaron mentions the stock market going up a lot since 2009, and this is true, but this has more to do with strong economic fundamentals (profits & earnings, globalization, consumer spending, technology, rich people consuming, etc) than QE or money printing.

Just look at multinational companies like Google, Amazon, Apple, Disney, Microsoft, and Nike, all of which keep posting strong earnings quarter after quarter. The new Star Wars movie set a box office record and is expected to gross over $2 billion globally. People are buying stuff, and businesses are transacting with other businesses. The S&P 500 is up 25%, and the QQQ tech index up 40%, since 2013 when the fed announced they were going to end QE. That is evidence economic fundamentals, not the fed, are driving this economic and stock marker expansion.

Although valuations have risen since 2009, they are still well-below the 2000 highs in spite of the market tripling since 2009, and are still within the historical average, again evidence that fundamentals seem to be at work here:

Also, too add, foreign countries don’t want to dump their US dollar holdings, because they are devaluing their currencies to boost growth, as part of the global ‘race to the bottom’, which America is the beneficiary in the form of a strong dollar and low inflation.

However, as I have argued numerous times before, America’ reserve currency status is not an invitation for reckless spending.

As I’ve written about in the past, with the exception of certain bright spots in the US tech sector and retail, the entire global economy is lethargic, creating a flight to safety and thus low rates, especially for American, Germany, and Japan. Also, deflationary forces from falling commodity prices. Deflation is a bigger concern than hyperinflation.

To end with, Aaron is right about the limitations of the CPI, and I discuss this further in Bifurcated Inflation. While there is very low inflation as measured by the bond market and certain items like apparel and electronics, prices for services such as healthcare, tuition, daycare, cable & internet, insurance, rent, and textbooks have outpaced inflation. The idea behind ‘bifurcated inflation’ is that services will become more expensive on an inflation-adjusted basis to compensate for real price declines in hardware and other tangibles. A television set is very cheap, but the cable required to make it functional is becoming more expensive. Netflix, on the other hand is cheap, but streaming internet (required to make Netflix functional) is not, and has outpaced inflation:

The Big Short: Market Genius or Luck?

There are a lot of finance articles lately due to the hype over the film adaptation of Michael Lewis’ book The Big Short.

Interview with Michael Burry, Real-Life Market Genius From The Big Short

Is he a market genius or did he just get lucky? There is evidence of genius, in that between 2000-2008 Michael Burry returned 500% to his investors vs. a flat market, quite possibly the highest return of any fund that decade. Even more impressive, he did not get wiped out in the 2008 bear market, capturing both the bull market and the bear with perfect timing. That kinda throws water on the whole leftist belief that the market is rigged or a scam, or that the only way people make money in the market is with luck, cronyism, or deception instead of skill or talent. Obviously, he had no connections with Washington. He didn’t engage in insider trading. Using his superior intellect, he was able to find slivers of opportunities in a market that is otherwise impenetrably efficient.

But back to the original article, is there a crisis coming? The odds of another crisis are slim.

From a discussion, someone list some possibilities:

1) Some kind of dollar, global reserve crisis that rocks the global economy for a while. Spurred on by the US debt and projected near future large budget deficits due to welfare and entitlement spending.

2) Broader bond market. I think this is a well understood threat, and doesn’t require much elaboration.

3) A specific junk corporate debt crisis. About half of the major corporate defaults in 2015 were US companies, which have levered up significantly on the back of the Fed’s super easy money policies.

4) Another significant drop backwards in the asset bubbles the Fed just got done re-inflating. If the Fed’s policies fail to provide enough to sustain those huge asset classes (real estate and equities primarily), then when they tip over it’ll pull the US economy down into a protracted recession. The global economy is practically in a rolling recession as it is, if the US goes next it would cause a lot more global pain (including amplifying the problems in China and Japan, both big exporters to the US). There’s a real debate to be had about whether the Fed can ever actually create a scenario in which the intentionally inflated assets can sustain (stand alone without Fed props), or if they have to always deflate backwards with a hefty penalty for the market manipulation / forced capital misallocation (which then prompts even more dramatic action at each turn, to try to re-inflate).

Dollar collapse & hyperinflation seems unlikely, for reasons I give here and here. Despite all of the debt, the data suggests America is not at risk of defaulting from a genuine inability to pay; however, a technical default due to gridlock is possible.

The fed balance sheet is big, but interest rates are very low. The fed has posted a large profit, a 30% gain in 2015 for a profit over over $100 billion, which is sent back to the treasury.

Due to the mathematics of the yield curve and the composition of the fed’s holdings, the the odds of the fed losing money on its holdings are low.

“Short-term interest rates would have to rise rapidly to quite high levels — in the neighborhood of 7% — for the Fed’s interest expenses to surpass its interest income. Such an outcome appears very unlikely,” the paper said. In the event that the Fed did face a loss, it could simply hand no money back to the Treasury and, “in the most extreme case, future remittances would also be reduced (and recorded as a change in deferred credit), but the Fed’s capital base and financial position still would remain completely secure.”

Japan has a much bigger debt, they seem to be doing fine. Low interest and strong dollar is due to reserve currency status, flight to safety, emerging market weakness, commodity weakness, petrodollar, the large size of the US economy, and other factors.

Corporate profits are at record highs. A crisis in the corporate debt market would require either a major decline in profits (from a deep recession, for example) or a spike in interest rates, neither of which show any signs of occurring.

Overall though, a bet against the US stock market is probably doomed to fail, unless your lucky or skilled like Michael Burry was. Here’s why:

1. Nowadays, options are priced in such a manner that the expected value of buying out-of-money hedges is almost always negative. This is due to the inflated volatility for out-of-money put options and other factors.

2. It just so happened that the subprime mortgage meltdown coincided with Michael’s career; for the period between 1935-2007, his strategy would have failed. It also would have failed between 2008-present. Maybe it would have worked in 1987, so we’re talking three instances out of a century.* Right now, the evidence suggests banks have reformed their lending practices, with higher credit scores for new homeowners, so the odds of another banking meltdown in America are slim.

3. Then you have the constant stock buybacks, tame inflation and modest valuations, record high profits & earnings that keep growing, consumers that won’t quit consuming, and so on. A totally different landscape than before 2008 when Taleb, Michael, and other bears made their fortunes. I just don’t see a compelling reason for stocks to fall much.

4. A bet against the stock market (especially tech) is a bet against capitalism, technology, high-IQ, and the best and the brightest. Do you really want to bet against Amazon, Facebook, Microsoft, and Google? Do you want to bet against the fed and a billion consumers from all over the world, along with all wealthy consumers from China? I sure as hell don’t. Just because bears made money in 2000 and 2008 doesn’t mean it will work again. It may be years or even decades before there is another a big selloff. For every success story of someone who bets against the market, there are a dozen losers, although no one makes movies or writes books about them.

5. Perpetually low interest rates makes stocks more attractive at a higher valuation than usual. The price part of the P/E ratio is reduced when inflation is very low. When inflation is high, cash is more attractive.

Profitably betting on the collapse of the financial system is obviously much harder than merely betting on a decline. When you restrict the payoff to near default (>80 or greater loss of price of the underling security), the math shows that only 1929 (around that period) and 2008 would have yielded a positive return.

Of course, leftism is to be expected in anything even tangentially related to Michael Lewis, from the article:

The zero interest-rate policy broke the social
contract for generations of hardworking Americans
who saved for retirement, only to find their
savings are not nearly enough.

There isn’t really a ‘social contract’ in the Constitution, Declaration of Independence, or anywhere. There is no document that stipulates that the government owes anyone anything beyond ‘life, liberty, and the pursuit of happiness’, which are intentionally vague. The expanded ‘social contract’, which includes housing, jobs, guaranteed income, welfare, education, healthcare, high interest rates,…etc, is a construct by the left to justify more wasteful entitlement spending, to make the rich feel guilty for not spreading their wealth more than the high income taxes they already pay.

The evidence actually shows that a better returns can be had with stocks than cash (bills). Even with rates at 4%, stocks way outperform cash:

Putting cash into a bank is a poor way to save for retirement, if past performance is any clue.

The ‘hardworking person’ saving for retirement by stashing all his money in the bank may more myth than reality.

The majority of Americans have little to no savings, so the difference between 0% rates and 4% is immaterial if your expenses exceed your income.

The problem is not that interest rates are too low, but rather people suck at personal fiance. But on the other hand, the Paradox of Thrift suggests that it’s ‘good’ for the economy that people don’t save too much.

Those who have more wealth put it in bonds, collectibles, real estate, or index funds. They seldom just keep it in cash.

Another thing that’s kinda annoying are all these people who think their predicting of the housing market bust in 2006 is attributable to some sort of profundity on their part, rather than just broken clock theory.

Contrary to popular belief, many pundits were actually bearish on housing in 2004-2007. Given the enormity of the crash, it makes these predictions seem more prescient than they really were, but such predictions were hardly unique. Of these pundits, very few actually made money betting against the housing market. A Google news search from 2004 to 2006 shows many pronouncements of a bubble or crash in housing, as well as much skepticism of the housing market.

About half of the entries are pessimistic about housing (articles by CNN, NY Times and Bloomberg, Mises Institute, Robert Shiller), and the other half are bullish, dismissive of a bubble, or neutral (Cato Institute, WSJ).

By late 2006, being bullish on housing actually made you more of a contrarian than being bearish. As a rational realist, I’m not too impressed that someone predicted something that hundreds of other people also predicted in that same time period, and then didn’t even act on it by shorting the market. Also, the vast majority of pundit predictions are wrong (like all those failed predictions between 2009-2014 for the stock market to crash and or for a double dip recession), so being right once out of dozens of incorrect calls is hardly a sign of innate skill or prescience at forecasting.

* Restricted only to American financial institutions. Foreign ones have had many more crisis.

Post-Labor Capitalism

In my post about conservatives being smarter than liberals, I ended on cliffhanger, leaving the solution open:

Solutions are hard to come by. Simply getting rid of democracy won’t change the fact there are already millions of people dependent on govt. aid.

I also discuss the ‘un-participatory’ underclass here (why collapse can wait) :

Entitlement spending could be problematic. Immigration control won’t stop the millions who are already citizens and producing negative economic value. That leads to the e-word, eugenics, which few have the bravery to endorse, but I see it as possibly the only long-term viable solution to the entitlement spending problem, in addition to restricting low-IQ immigration. Boosting the national IQ by just a handful of points can help remedy a multitude of problems.

We now have life, liberty, free emergency room treatment, ebt, education, section 8 housing, and the purist of happiness…for all. The government won’t allow sick people die in the streets, nor will it deny certain services. Or maybe there will be enough abundance created by technology and the productive class to take care of everyone…hard to know.

And here (hive mind, immigration, and IQ):

Booting the nation’s IQ will likely boost exports, GPD, profits, and technological innovation – but not necessarily real median wages. But that may be OK, though, because new technologies lead to more utility, as in the example I give of TV sets or movie tickets. Technology may improve living standards, so much so that wealth inequality and stagnant wages may not matter. The result, however, may be an ‘un-participatory’ economy where a lot of people are not contributing much to economic growth, nor are participating in the gains such as measured by real wages, in accordance with the Pareto Principle.

As I explain in collapse can wait and other posts, I am optimistic about the US economy and stock market – both in the long-term and short-term – in spite of this large (and growing) underclass. But I don’t sufficiently explain the mechanism for how the economy and stock market is supposed to thrive even when a lot of people are a net-negative as indicated by negative effective tax rate:

The result may be a post-labor capitalist society, and we’re already headed in that direction. This is similar to the Marxist post-labor utopia, but with capitalism, too, as I explain here:

…while Marxists may support technology to bring about a post-labor society, not everyone who supports technology and post-labor is a Marxist. There will always be capitalism, scarcity, and markets, even if the labor force shrinks and or a lot of job become automated (which is assuming the Luddite Fallacy stops being a fallacy). Rapid gains in technology hasn’t made healthcare or tuition more affordable. Same for insurance, day care, and other services. There will always be demand for positional goods to signal status. There may even be a form of capitalism that exists between apps and robots, excluding almost all people.

As the labor force participation rate sinks and the ‘number of hours worked’ falls, we’re also seeing the rise of unconventional labor such as gig and freelancer jobs. At the same time, information technology companies, apps, biotechnology, and multinationals will continue to thrive. Just because we become a post-labor or post-salary society doesn’t mean that capitalism will fail or become obsoleted.

Some characteristics of America’s post-labor society:

1. fewer hours worked
2. falling labor force participation rate
3. rise of gig and temp jobs , neither of which may be counted in official labor statistics
4. ‘hollowing out‘ of middle/bifurcation of economy
5. less job security
6. fewer job openings, but also fewer job seekers as able-bodied individuals choose to dropout of labor force

The doom and gloomers argue that this large underclass will drain the economy and cause a debt crisis due to runaway entitlement spending, but another possibility is that an equilibrium will be attained due to factors such as technology, US reserve currency status, huge demand for low-yielding US debt, and surging taxable profits from multinationals that helps pay for the entitlement spending programs. This way, income taxes need not have to rise in order to fund these programs. In fact, taxes are historically low, only rising in 1993 and in 2013 due to partisan pressure, not out of economic necessity.

The interest paid on debt relative to GDP is historically low:

Part of what makes America exceptional is not just its superior economy or superior military, but the insatiable demand for its debt, especially compared to other countries.

America also has the petrodollar. This is a huge deal, and partly explains why the dollar is so strong in spite of the debt. Whenever oil exporters sell oil, they get dollars. This boosts the dollar.

So what about those net-negative people? As it turns out, while they may be a drain on the treasury, they are boon for large corporations that derive revenue from consumer spending and population growth – companies like Disney, Nike, Facebook, Netflix, and Google. That’s why stock prices, profits, and earnings keep going up, and why they will continue to do so. * And also why the US economy, contrary to the doom and gloom, is doing alright. Because the US government can finance these net-negative people at virtually no cost due to reserve currency status, corporations can reap all of the top-line profits from consumer spending.

The result is that many economic metrics can remain strong even with a low labor force participation rate and a high level of debt.

Economies of scale and rapid gains in technology also helps by increasing utility, meaning that even if real wages remain stagnant and the labor force participation continues to decline, technology will provide enough utility to keep people satiated. Technological progress provides a deflationary force by making things cheaper, better (more utility), and more abundant. Cheap food, electricity, and clean water are available to everyone of all income levels, whereas generations ago there was more scarcity. But this is not the same as post-scarcity economy, because there will always be some scarcity such as for status-signaling goods, as well as costs for services like insurance, daycare, gas, cable, and internet. This is also why a basic income is unnecessary, because of existing entitlement spending programs and abundance due to technology and mass production.

However – through the creation of industries, technologies, and research – smart people tend to produce more economic value than everyone else, so as to not let cognitive capital go to waste, I support a high-IQ basic income. It’s like a government Mensa that pays its members. Very un-egalitarian, but seems only fair given that the fate of the economy hinges on the ability of these smart, productive people to support the millions of net-negative people.

Can the equilibrium be disrupted? Technically, anything is possible, but I don’t see it happening. Globalization and reserve currency status changes the rules of macroeconomics, allowing the US government to perpetually fund deficits without the usual side effect of bond-based inflation. This is because America is able to export its inflation.

The US economy is a sweet spot where growth can help inflate the debt away, but a slowdown will cause yields to plunge. Thus in either scenario, debt interest as a percentage of GDP is unchanged. A recession would probably cause medium and long-term treasury bonds to fall as much as 30% such as in 2001, 2008, and 2011.

Despite steady GDP growth, debt forecasts are already being lowered:

Still, the nonpartisan Congressional Budget Office, in its annual long-term budget outlook, projected that by the fiscal year 2040 the government’s debt would be equal to 107 percent of the country’s annual economic activity — up from the current 74 percent of gross domestic product. Last year the budget office projected the 2040 debt level would reach 111 percent of G.D.P.

A gain of 33% over a quarter century doesn’t seem too scary. The fact that Japan, which has a weaker economy than America, is stable despite a much higher debt to GDP ratio ratio than America, is reason enough to not be too concerned about America’s debt. Like America, Japan’s labor force participation is a multi-decade lows, falling from 73% in 1955 to around 60% today.

Furthermore, according to a data compiled by Joe Wiesenthal of Business Insider, America has substantially more assets than debt:

Total assets are around 1300% of GDP. Some of these assets are non-performing and should be sold.

…the budget office shaved a half-percentage point from its forecast of last year, putting the cost of interest on the debt at 4.2 percent of G.D.P., down from a projected 4.7 percent last year.

By comparison, interest costs in this fiscal year are 1.3 percent of G.D.P.

It’s worth reminding that interest payments are still ridiculously low. Should medium and long term interest rates remain as low as they are now, debt forecasts will continue to fall. A lot of these scary debt forecasts were made in 2012 & 2013, when it was predicted that interest rates would quickly rise, but with the fed forever dovish, and due to deflationary forces from falling oil and weakness in Europe, China, and emerging markets – treasury yields keep falling. It seems like every time the ‘experts’ predict inflation, deflation strikes instead. Everyone is expecting things to return to how they were in a pre-2008 world, where 4-6% interest rates were the norm, but those days are most likely gone forever. There’s just too much deflation, too much fear and flight to safety. Due to globalization, we’re in an era of currency wars and the ‘race to the bottom’ as countries depress their currencies to boost growth, with the US dollar the winner. China is trying to depress the Yuan, so dumping their holdings of dollars would be counterproductive, helping to keep interest rates and inflation low in America.

The slight reduction in the economy’s predicted growth is “primarily because of the slowdown that C.B.O. anticipates in the growth of the labor force,” the office said, as “the fraction of the population that is of working age shrinks.”

Fewer people working means less inflation , hence lower interest payments. But consumer spending and economic activity doesn’t fall even though fewer people are working. **

But that does not mean I condone wasteful entitlement spending – I don’t – but I don’t see a crisis anytime soon. I’m guessing what will happen instead is that the economic contributions from the most productive will be able to compensate for the least. The future is one where a decreasingly small percentage of individuals and corporations contribute to the bulk of economic output and activity – the Pareto Principle again, in which 20% contributes 80%, as shown below:

In the future, the curve will become steeper – possibly until a singularity is attained – one company to rule all- the Matrix? This could be the ‘other’ singularity, but instead of AI and computing power, it’s a company or economic entity.

* A more detailed explanation involving Modern Monetary Theory can be found here. To sum it up, when the government runs a deficit, it helps corporations. When it runs a surplus, it hurts them.

** This is due to the US govt. running a deficit, which helps corporations; various entitlement spending programs; private sector spending even if it adds to the deficit; and rich consumers both domestic and foreign compensating for weakness in America’s middle and lower class. The Pareto Principle also applies to consumer spending, with the richest 20% contributing 80% to consumption. Also, rise of the BRIC ‘middle class’, with billions of new consumers to supplant America’s middle class.

Don’t Blame the Fed – Blame Stupid People, Liberalism, Democracy

Bitcoin keeps going up, now $110 higher than my post about it last week and over $220 higher than my purchase price:

Anyway, someone posts:

We all know the state of the financial world is far from good, just a few points:

  • Government debt at unprecedented levels.

  • Still at emergency easing levels 8 years later and we are still worried coming off that will crash the economy.

  • Equity and bond markets pretty much rigged… it is seen as political taboo for them ever to drop.

  • The whole world reliant on the state to always come to the rescue.

  • Eurozone “experiment” seeming to be cracking.

  • Rise of socialism.. Sanders in U.S Jeremy Corbyn in Uk

  • Printed a sh*t ton of money and still virtually zero inflation.

Thats just for starters, you can’t talk to anyone in the markets that doesnt just shake their head and say “what a mess”. BUT, humans love a scare story, we are always looking for a disaster. People have been calling for another 08 style crash since.. well 08. I think central bankers are morons for the most part. But you have to give them some respect they are highly educated people, its not in their interest to mess things up. My question is what is their theory behind all this? Is there anyway we can move forward and have a “normal” market and their plan work. Im not asking you to believe in it yourself. But im genuinely curious from an intellectual point of view what is their plan?

I don’t deny there are problems with the country; otherwise, I wouldn’t have a blog devoted to trying to find solutions. But where Zerohedge and the rest of doom and gloomers get it wrong is in shifting the blame to from individuals to big, ‘scary’ entities (Illuminati, fed, bankers, congress, Wall St…etc), ignoring the role of IQ as it pertains to crime, socioeconomic outcomes, why some people are always falling behind. After a certain point, if you keep blaming the fed, you lose credibility. The doom and gloomers are misdiagnosing the problem – the entitlement spending problem is due to liberalism and democracy that enabled it, and that’s why the alt-right ‘gets it’ when everyone else doesn’t – they understand the root of the problem. The fed didn’t cause the achievement gap between blacks and whites, for example. The fed didn’t put a gun to these leftist idiots telling them to major in worthless subjects….or tell the loser homeowners in 2005 to buy more home than they could ever possibly afford…or force Michael Brown to steal from that store…The point is we have biological limitations (IQ, for example) and some free will within those limitations (to buy stocks, to buy real estate, to read the fine print, to try to major in a good subject, to not steal…etc). And people with good genes who make good decisions tend to rise above those with bad genes who make bad decisions.

A person who has the capacity to make decisions and the makes the wrong ones and then complains about the outcomes of their decisions as if they are a victim – is a loser. Same for choosing to live in an alternate reality instead of confronting the existing one, which is the problem with much of the alternative media. They want to believe in doom and gloom and the victim mentality because it’s easier to just wait for the deck to be shuffled and re-dealt in the hope they will get a better hand than to play the cards they have. The future of America and the global economy is like today, but more so. People who understand these trends can succeed, and those who dig in their heels will be left behind.

But back to the original post, if the debt were truly a big deal, it would be reflected real-time in the bond market in higher yields, but yields right now are still at near historic lows and this is long after the fed ended QE, so you can’t blame the fed anymore. My money is on the bond market being right over a broken clock like Peter Schiff.

As I explain here, part of the debt hysteria has to do with a misunderstanding of who actually owns the debt. China owns only 8%. The fed pays it’s interest back to the treasury. Government institutions and trust funds (social security, for example) control a lot of the debt.

Only about 60% of the debt is non-government related.

Europe has been in decline since 2011…not really a big deal anymore, and mostly their own doing due to socialism. None of the major S&P 500 companies have reported significant Eurozone issues. Hillary should win the nomination against Sanders, although I’m voting for Trump. QE, btw, is not money printing, and the reason why there is little CPI inflation is due to the low velocity of money:

What Zerohedge does not understand is that government debt and spending in and of its self is not the problem – liberalism and democracy, which determines how it’s spent, is.

Related:

Is the National Debt a Big Deal? Maybe not
Foreigners Keep Buying US Debt – And it Makes the Left Mad

Economics Myths, Part 5: QE (Quantitative Easing) Misconceptions

Few subjects cause as much confusion as QE. The confusion arises due to the politicization of the issue, as well as common misunderstandings and misconceptions about QE that reverberate throughout the blogging/media echo chambers. There are three major misconceptions about QE:

1. QE is money printing

2. Stocks are rising because of QE – and or – the economy is dependent on QE

3. QE, with 100% certainty, does or does not work

————-

1. It’s not. QE is an asset transfer in which the federal reserve buys long-term treasury bonds and replaces them with reserves. The reserves cannot be lent out, nor can they be used to buy stocks, as sometimes believed. This is why QE has not caused rampant inflation in spite of fears that it would. The rationale behind QE is that by buying long-dated bonds, the fed can spur inflation by lowing long-dated yields after conventional monetary policy at the ‘short-end’ of the yield curve has been exhausted, since the federal funds rate cannot go below zero. Lower treasury bond yields makes riskier assets like stocks more attractive.

Right now, QE is still profitable for the fed:

The reality has been happier. The Fed’s assets have ballooned to nearly $3 trillion, mostly in Treasuries and mortgage-backed securities (MBS). It paid $89 billion in profit to the Treasury for 2012, the largest in a string of record-breaking remittances

80% of the Fed’s income goes back to the treasury.

The so-called “bail-outs”, for instance, weren’t in the form of a taxpayer loan or bond to these member banks, it was simply the act of the Federal Reserve allowing certain favored member banks the one-time privilege to actually print money without loaning it out. You don’t join the Federal Reserve system because you want to be a member, you join because you have no choice.

That’s why TARP didn’t cost the taxpayer anything, and won’t. Nothing costs really anyone anything unless someone demands payment, and thankfully the entire global economy runs off IOUs (credit). When a program costs so-and-so billion, it’s paid for by the treasury, which has the power to print money by fiat and sell bonds (the fed does not issues bonds, it only makes purchases buying or selling securities in the secondary market from or to dealers, either outright or through repurchase agreements). This is not an invitation to wasteful spending, but it’s tiring hearing the same nonsense that a government spending program must be immediately payable, like a toll at a bridge, when it isn’t. Debt is rolled over. This related is to fallacy of composition, which I discuss earlier, in people mistaking government spending as being the same as a personal transaction. In the US, taxes have only gone up due to political pressure by the left, not out of economic necessity.

From federalreserve.gov Is the Federal Reserve printing money in order to buy Treasury securities?

No. The term “printing money” often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency. This situation does not exist in the United States. Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty. In addition, U.S. currency has expanded at only a moderate pace in recent years, and the Federal Reserve has indicated that it will return its securities holdings to a more normal level over time, as the economy recovers and the current monetary accommodation is unwound.

Due to huge demand (foreign and domestic) for low-yielding US debt, inflation has remained low, as well as record low interest paid on debt relative to GDP. As I discuss here, contrary to popular myth of America being ‘enslaved’ to China, China only holds about 8% of the debt.

Indeed, in spite of all the doom and gloom about printing money and hyperinflation, the growth rate of currency in circulation is in-line with historic trends of about 6% per-annum or, equivalently, about 80% every 10 years:

The growth rate between 1985-1995, 1995-2005, and 2005-2015 are all roughly the same.

However:

Furthermore, population projections predict that when the “baby boomers” start to retire, the working population in the United States, and in many other countries, will be a smaller percentage of the population than it is now, for many years to come. This will increase the burden on the country of these promised pension and other payments—larger than the 65 percent[21] of GDP that it is now. The “burden” of the government is what it spends, since it can only pay its bills through taxes, debt, and increasing the money supply (government spending = tax revenues + change in government debt held by public + change in monetary base held by the public). “Government social benefits” paid by the United States government during 2003 totaled $1.3 trillion.[22]

Which is why I advocate euthanasia to help curb healthcare spending, which I will in detail in a forthcoming post…

2. As shown here, stocks are rising mainly because of buybacks and record-high profits & earnings:

The link between QE and rising stock prices may be spurious. The fed began to taper way back in Spring 2013, but the market rallied another 20% in the two years that followed. The market continued to rise after the fed officially ended QE in October 2014. But if the market and economy were entirely dependent on QE, there would have been a bear market and recession in 2013, which obviously there wasn’t.

3. Related to number 2, the verdict is still out as to whether or not QE 2 & 3 were a success. #2 suggests the economy is is not dependent on QE, and QE may amount to little more than a ‘nudge’ for the economy than a life-saving elixir, in spite of all the media and blog attention it has gotten. The fact stocks respond favorably to QE announcements suggests the market deems it somewhat effective, but how much is hard to quantify. Importantly, inflation is still below the fed’s target, which pretty much refutes those hyperinflation fears. Even if inflation were to rise above the target, because correlation does not imply causation, one cannot necessarily blame QE. And, by the same token, an improving job market is not proof QE worked, as there are other possible reasons for the improving job market. QE, like most complicated subjects, raises more questions than it answers.

The Economic Crisis Is In Brazil and Turkey, Not China

As the media goes on and on about a supposed ‘China crisis’, as if a 1% decline in China’s GDP growth constitutes a depression, Brazil was recently downgraded to ‘junk’ by Standard and Poors, meaning that Brazil’s economy, which is heavily dependent on oil, is doing so poorly that the risk of default can no longer be ignored. I was correct in advising investors to stay away from the emerging markets, and that things would get worse. America is still the best place to invest.

The crisis is in crappy economies like Turkey, Russia, and Brazil – not China. Lets put things in perspective. China’s recent currency devaluation, for all the media attention it got, pales in comparison to the post-2013 plunge in the Brazil Real and Turkish Lira:

China’s currency devaluation looks like a blip compared to the long-standing trend:

CAD, JPY, AUD have fallen compared to the strong USD and CNY.

From CNBC: Brazil economy sinks into worse-than-expected recession

Brazil’s economy shrank 1.9 percent in the second quarter, sinking into a recession that has hammered the popularity of President Dilma Rousseff as she struggles to save the country’s investment-grade credit rating amid a vast corruption scandal.

The quarterly contraction, reported by government statistics agency IBGE on Friday, was bigger than the median forecast of a 1.7 percent drop in a Reuters poll.

The media is overlooking how other countries are in much worse shape than China and America.

There is also a positive correlation between mean IQ and economic success, with smarter countries like China, America, Singapore, Hong Kong, South Korea, and Japan doing better than low-IQ countries like Turkey and Brazil.

Don’t be fooled by purportedly high nominal GDP. Low-IQ countries tend to have high inflation, too, which results is much less real GDP growth. Also lots of corruption, falling currencies, and capital flight.

As shown below, sovereign yields for big economies are falling:

This is why America’s debt is much less of a big deal compared to emerging market debt, despite all the media doom and gloom about America’s national debt. The debt is high, but it’s not a crisis.

Smaller economies like Brazil and Turkey don’t have reserve currency status, which means that the worse things get economically, the more capital will leave those countries, creating a feedback loop of more inflation and a worsening economy. America and Japan are unique in that when there are economic problems, borrowing costs fall – the exact opposite of what happens in smaller economies.

After factoring in inflation and currency risk, there is little to no wealth being created in these emerging markets for investors, whereas investors are getting rich in America with Bay Area real estate and the S&P 500, for example. That’s why so much money from China is flowing into America and its real esate. America not only offers real asset appreciation, but political stability and unassailable property rights, or at least better than in China.

Low-IQ countries can temporarily fare well with commodity exports, but as we saw recently with Brazil, commodity exports tend to be volatile due to speculation, price swings, and other factors, whereas intellectual property exports like software and media, which tend to be the domain of smarter countries, are more stable than commodity exports.

Related: China and The Liberal War on Success

Bailouts, Obama, and Debt

From Christopher Cant-think-well:

And Then The Market Crashed Anyway

He writes:

You might recall that incident, when George W. Bush said he had “abandoned free market principles to save the free market system,” don’t you? Lotta good that did.

Last time I checked, it may have done a lot of good. The S&P 500 has surged 100% since TARP, and earnings have more than doubled. There are other factors besides TARP for the post-2008 rally, but the consensus is that TARP was a success far exceeding anyone’s expectations, and the money was repaid in 2011.

That catastrophe was followed by a two term Obama presidency, the Orwellian named “Affordable Care Act” (Obamacare), staggering increases in taxes, regulatory burdens, and government debt.

I agree the Obama presidency has been more or less a failure. It only ‘succeeded’ because it wasn’t as bad as it theoretically could have been, thanks to congress for at least trying to curtail Obama’s power. I opposed the auto bailouts and the Obama stimulus (American Recovery and Reinvestment Act of 2009), arguing that unlike TARP such programs were a waste of money, and most economists agree the Obama stimulus was ineffective. The stock market is rallying in spite of Obama, not because of him. Thank Bush, Bernanke, free market capitalism, low taxes, foreign investment, the tireless consumer, high-IQ, and web 2.0 for the post-2008 recovery, don’t thank Obama. Same for the success of the war on terror an the killing of Osama…thank Bush, not Obama.

The debt is high, but it would have still been high with 8 years of Mc Cain or Money..maybe not as high, but still high. And it wouldn’t matter that much, as inflation is still low and debt repayments as a percentage of GDP are near historic lows:

If you call yourself a ‘realist’, as Christopher Cantwell does, that means having to confront economic reality, even if you don’t necessarily like it or agree with it. You can’t call yourself a realist and then go about picking and choosing the ‘reality’ that confirms your preexisting beliefs and ignoring the ‘reality’ that disagrees.

Alexis Tsipras, the Greek Prime Minister, has resigned and called for snap elections – which he is expected to win – in the wake of abandoning his campaign promises and accepting a third round of European bailouts in exchange for austerity measures he campaigned against. Further adding to political and economic uncertainty in Europe.

This statement has nothing to with stocks, and anyone with a working brain cell knows Greece is a basket case, anyway.

In China, following a massive drop in stocks which occurred in late June, the Chinese central bank responded with a rate cut. That didn’t stop their markets from dropping another 7 percent shortly after. The Chinese government responded with a series of measures aimed at propping up the stock market, like further rate cuts, government backed stock purchases, and halting the sales of some shares. That didn’t prevent their steepest one day drop in 8 years on July 27th. The Chinese government did everything they could imagine to prop up the market.

But that isn’t proof that the programs were ineffective. Instead of falling 7%, without such programs it may have fallen 27% – we don’t know. If the goal was preventing any subsequent decline, then yes it was failure. But when there’s a crisis, due to the ‘flight to safety’, borrowing costs for reserve economies to plunge, making the bailout effectively free. Small economies tend to have the opposite situation of money fleeing during crisis.

Far from securing our futures, our as of yet unborn children are saddled with debts so massive we would never dare contemplate taking them on ourselves

No one actually pays the debt all at once. It’s continuously rolled over. The only reason why taxes went up in 2013 was because of Obama’s refusal to compromise, not out of economic necessity. As I explain earlier, America’s reserve currency status is keeping borrowing costs relative to GDP very low. Here is the debt pie chart:

But a large portion of the debt is held in funds that will never sell even if the dollar does weaken. All interest paid to the Federal Reserve is returned to the treasury. For all the hype over China dumping debt, they control only 8%.

We’re Not Broke

The documentary We’re Not Broke went viral on Reddit. The synopsis is that the Republicans are wrong about America being broke, and that there would be more money for social programs and infrastructure if tax loopholes and other problems were fixed.

Despite being on the right, I agree with the ‘left’ that America is not broke. And up until 2007 or so, many Republicans also shared this sentiment until the debt hysteria took over, which puts me in a very small minority among the alt-right. But that’s where the agreement ends. Whereas the left wants more money for social programs and welfare, I support supply-side policy that broadens the tax base and spurs innovation by helping America’s best and brightest, as well as policy that keeps America safe, which is summarized below:

How the left wants to spend money:

Indiscriminate education spending, universal pre-k
Free tuition for everyone, student loan forgiveness
Indiscriminate entitlement spending
Universal healthcare
Low-tech infrastructure
Universal basic income

This blog:

More money for gifted education
Reduced or free tuition for high-ROI majors (STEM) and or high-IQ students, who have the greatest likelihood of not dropping out
High-IQ basic income
Lower taxes
High-tech infrastructure
Investment in high-tech, high-IQ companies (like Tesla and biotech, for example)
Defense spending to protect America’s economic interests. If America cannot defend itself, society will regress to the level of its aggressors.
Targeted healthcare (As America’s population ages, it’s possible public healthcare costs will spiral out of control more than they already have. Thus, costly procedures may have to be prioritized to individuals who provide the most economic value. Therefore, all else being equal, a high-IQ person, who provides more value to society, would have priority over a lower-IQ person, who contributes less. The idea is pubic healthcare expenditures should be allocated in such as way that it provides the highest ROI. An example of rationing that occurs today are organ transplant waiting lists. A solution is to sort the list not just by urgency but also IQ, with smarter people having priority over the less intelligent.)

The problem is not America’s debt or spending; it’s how money is being spent. In choosing between indiscriminate spending, versus spending that is targeted in such a way that it provides a high ROI (the optimal allocation of resources), the choice should be obvious. This is where I part with the Mises/Austrian school of economics in that debt is not bad always bad, especially when a country has reserve currency status* as America obviously does.

In the 90′s, Bill Clinton and Al Gore, to their credit, understood that government investments in information technology would pay dividends, but today’s left, rather than supporting pro-growth policy, instead attack technology for causing wealth inequality and displacing jobs.

*America is kinda in a sweet spot : if the economy is sluggish, the flight to safety causes rates to plunge as we saw in 2008 and 2011. If growth overheats, the growth will be enough to offset the higher interest rate payments. Japan has been in the former scenario for decades without any problems. If Japan, which has slower growth, worse demographics, and a much higher debt/GDP ratio, can avoid crisis, America, which is economically better in pretty much every way, certainly will, too. Emerging markets have the opposite problem: negative inflation adjusted growth, high interest rates, and capital flight during economic weakness. Furthermore, the surging US dollar is more evidence of the post-2008 flight-to-quality trend. With the exception of China, the rest of the world is economically in much worse shape than America.