"Debt"

 

I do not claim expertise about U.S. Treasuries, nor about any fixed income securities. And I am not an economist; so there are those that may argue with some of my assertions and conclusions. Nevertheless, I worry as to what the unprecedented period of exceptionally low interest rates we experienced, beginning in the wake of the 2008 credit crisis and then re-adopted during the Pandemic, may have done to our attitudes toward debt.

 

By the way, if you get a chance Google Daniel Hannan and his March 24, 2009 speech to the European Parliament, the speech from which the rubric heading this essay comes. In the speech he eviscerates the British Prime minister Gordon Brown, as only an English Parliamentarian is able.

 

Sydney M. Williams

www.swtotd.blogspot.com

 

Thought of the Day

“Debt”

May 3, 2024

 

“You cannot spend your way out of recession or borrow your way out of debt.”

                                                                                                                                Daniel Hannan (1971-)

                                                                                                                                British Member of European Parliament

                                                                                                                                Speech, March 24, 2009

 

Many problems we face make the front pages, and deservedly so: seven and a half million illegals through our southern border over the past three years; A Messianic belief that man alone is responsible for climate change; pro-Palestine and anti-Semites protesting on college campuses for misogynistic Hamas; rising crime; an aggressive China and revisionist Russia; a domestic education system that focuses on identity politics rather than fundamentals of learning; a belief that equal outcomes should replace equality of opportunities; and that energy inflation can be cured by controlling prices and limiting supplies. With that, debt and deficits are relegated to the back pages.

 

………………………………………………………………

 

Yet too much debt moves the hands of the doomsday clock closer to midnight. However, when entered into judiciously, debt can be a good thing. Mortgages, auto loans, and the purchase of appliances on time have allowed consumers to live lifestyles unavailable to their forebearers. Student loans, when not overwhelming, lead to improved earnings. We should, however, live within our means. As for the state – a nation must be able to keep secure its people and its principles. As well, it must be able to fund infrastructure projects and other necessary expenses. Because the state has the ability to print its currency, living with a balanced budget, while preferable, is not necessary.

 

However, when too much leverage is employed – examples being NYSE margin requirements of 10% in the 1920s and reduced/no-down-payments on housing in the 2000s – debt leads to a collapse in pricing and a loss in values. When incomes fail to keep pace with debt accumulation, risks of bankruptcies rise, as happened in 2023 when bankruptcies reached a 13-year high. And when a nation’s spending causes it to raise taxes to a level that inhibits, or limits, economic growth, everyone suffers. 

 

Over the past several years, we have become addicted to low interest rates, which encourage borrowing and discourage savings. After years of near-zero Fed Fund rates, following the 2008 credit crisis and despite 23 subsequent quarters of positive GDP growth, the Fed only began to raise rates in the 4^th quarter of 2015. With the advent of Covid in the first quarter of 2020, the Fed again lowered the rate to near zero, which is where it remained for two years, until the second quarter of 2022, despite strong GDP growth in 2021. When inflation became a problem the Fed raised its benchmark rate. Now, despite inflation still running ahead of the Fed’s target, many are urging the Federal Reserve to lower rates before year end. And perhaps they will. Politically it is tempting, especially in an election year. However, consequences of years of exceptionally low interest rates include government bloat, an increase in debt, a rise in asset prices, and inflation – an unsustainable burden on our children and grandchildren, a burden they will have to bear. 

 

Between 2003 and 2022 total household debt almost doubled, rising from $8.3 trillion to $16.4 trillion, while median household income rose 13%, from $65,860 to $74,580. These numbers are disturbing, but it is what happened at the national level that is of more concern. In 2000 federal debt was $5.63 trillion, a little more than half of that year’s GDP of $10.3 trillion. Twenty-three years later, federal debt stood at $32.99 trillion, while GDP in 2023 was $27.4 trillion – the first time since World War II that federal debt exceeded GDP. Interest expense on that debt in 2023 was $659 billion, or about two percent. Should interest rates remain at current levels (4.6% on the 10-year and 5.00% on the 2-year) interest expense will more than double over the next three to four years. Of course with continued deficit spending total debt will increase, further raising interest costs. Since both political parties have contributed to deficits and debt, the outlook is daunting. Neither party offers solutions.

 

In contrast, consider the immediate post-War years: In 1945 the U.S. generated $250 billion in GDP, with national debt of $258 billion. Fifteen years later, GDP had more than doubled to $543.3 billion, while debt had increased less than 50% to $382.6 billion. According to Trading Economics, GDP growth averaged four percent in the 1950s. Since the start of the new century, GDP growth has averaged about two percent. 

 

So, what are the risks? For one: In an August 7, 2011 interview on Meet the Press, Alan Greenspan said the issue was not one of credit rating: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” The risk, rather, is Milton Friedman’s “hidden tax”– continuing inflation. A second risk is higher taxes to pay for swollen government, an impediment to economic growth as high taxes limit returns on investment. A third risk is increased regulation, which hinders innovation. Adding to fiscal and economic problems has been a dearth of births. Economic growth is dependent on innovative products and services, productivity gains driven by technology, an increase in purchasing power of a nation’s consumers…and growth in the nation’s population.

 

The latter is a concern and a risk. In 2023, in the U.S., there were 3.6 million births and 3.46 million deaths – a year in which America’s birthrate hit a new low, with a total fertility rate (an estimate of the number of children a woman is expected to give birth to over her lifetime) of 1.62. A total fertility rate (TFR) of 2.1 is needed to keep population steady, absent immigrants. As China has discovered, a low TFR is difficult to reverse. So our future population growth will be dependent on immigration, suggesting to this observer that what is needed is a two-to-three fold increase in legal immigration, along with a closing of our southern border. Illegal immigration, over the past three years, has amounted to over two million per year. While some of these people will become productive residents, most incur costs. Legal immigrants, according to the National Immigration Forum, number about a million per year. Most of these people, many of whom have waited years to become citizens, add almost immediately to our nation’s economic growth.

 

Solutions to problems do not usually announce themselves in advance, so perhaps there is a way out of the quagmire in which we find ourselves. Nevertheless, smooth sailing does not seem to be in our immediate future. Federal debt (forget unfunded liabilities for Social Security, Medicare and Medicaid) exceeds GDP, with deficits continuing to expand, and with interest rates having returned to, historically, more normal levels. The Administration is adamant about writing more rules, increasing regulations and placing further restrictions on fossil-fuel energy production and distribution, all of which will increase costs to consumers. To pay for their expansion of government, they talk of raising taxes which will disincentivize investment and savings. Added to this unhappy picture are the demographic challenges we, and most of the West, face. It is hard to be Panglossian about the world we will leave for our children and grandchildren.

"Elephant Company," Vicki Constantine Croke - A Review

This non-fiction book was recommended by a cousin, retired to New Hampshire. Later, I found that a sister who lives there as well had also read it. It was published in 2014, was on the New York Times best seller list and a New York Times “Notable Book.” Many of you will have read it. If not, you are in for a treat. 

 

Despite having long been affiliated with the political party that uses an elephant as their symbol, that fact played no role in my reading of the book, nor in my recommendation; and I have no family connection to the hero of the story, James Howard Williams.

 

Sydney M. Williams

 

Burrowing into Books

Elephant Company, Vicki Constantine Croke 

April 27, 2024

 

“In non-monsoon seasons, the manager explained, timber was hauled by elephants to dormant, 

dry creeks, Then, when the rains arrived in the summer, stirring the tributaries to life, the lumber 

would rise with the flowing water and begin its journey to larger rivers, such as the Irrawaddy.”

                                                                                                                                Elephant Company, 2014

                                                                                                                                Vicki Constantine Croke 

 

James Howard (Billy) Williams – also known as “Elephant Bill” – arrived in Burma (Myanmar, since 1989) in November 1920. He was 23-years-old, hired by the Bombay Burmah Trading Corporation, Ltd., a company formed in Scotland in 1863, and today an India-based company headquartered in Mumbai. In 1920, the company was a leading producer of Teak, harvested in Burma and Siam (Thailand, since 1939). Williams was headed to the northwestern section of Burma, a remote region along the border with India, to work in one of their lumber camps. A map is provided and the reader develops a sense for the area.

 

Teak trees were cut during the inter-monsoon months (February to mid-May), when dry riverbeds allowed logs to be placed in them. Because there were few roads and virtually no railroads, elephants were used to build bridges across remote rivers and to carry logs to dried-out riverbeds before monsoon floods allowed the logs to be carried downstream to mills. 

 

Ms. Croke quotes from Rudyard Kipling’s 1890 poem “Mandalay,” written in a Cockney dialect:

 

“We useter watch the steamers an’ the hathis pilin’ teak.

Elephants a-pilin’ teak

In the sludgy, squdgy creek,

Where the silence ‘ung that ‘eavy you was ‘arf afraid to speak!

On the road to Mandalay…”

 

Williams had served in India and Afghanistan during the First World War. And he had always had a way with animals. But the jungle was new to him, as were elephants. However, his curiosity (providing an autopsy on a recently-died elephant) and his talents (from sketching to managing men and communicating with elephants) allowed him to succeed with the company and rise within its ranks. Along with many others, we are introduced to Bandoola, the best-known elephant and to his keeper Po Toke.

 

But that quiet, isolated world in Burma’s jungles and teak forests changed when the Japanese invaded. Rangoon fell as did Mandalay, and Williams is charged with evacuating his men, along with a couple of hundred refugees and about 55 elephants.

 

The last part of the book tells of their escape from the Japanese, out of the jungles and over the five-and-six-thousand-foot peaks that separate what was then Burma into Assam, a state in northeastern India. They were led by Williams and the indomitable Bandoola, providing an exciting climax to this fascinating story.

"Watch What They Do"

 What sort of a moral sense inhabits the souls of presidents and trustees of some of the nation’s most elite colleges and universities where anti-Semitic student protestors have been allowed to terrify and physically harm Jewish students, block entrances to university buildings, and chant for the annihilation of Israel? These people head institutions that are supposed to help form future leaders. God help us if they do not uphold the values for which they claim to stand.

 

On the other hand, my normal cynicism toward Washington politicians was tempered this past weekend, when the House, under Speaker Mike Johnson (R-LA) passed three separate bills to support Ukraine, Israel and Taiwan, and a fourth bill that would seize frozen Russian assets and force a sale of Chinese-owned TikTok. Democrat House Leader Hakeem Jeffries (D-NY) deserves congratulations for his help in this bi-partisan show of support for these important pieces of legislation. The United States has been singularly positioned as the leader of the free world for more than a century. With size comes responsibility – not to impose our way of life on others, but to provide a vision of what is possible when the individual is the basis of a “government of the people, by the people and for the people.” If we relinquish that role, the world will be worse off.

 

Sydney M. Williams

www.swtotd.blogspot.com

 

Thought of the Day

“Watch What They Do”

April 24, 2024

 

“Don’t listen to what people say; watch what they do.”

                                                                                                                Think Like a Freak, 2014

                                                                                                                Steven D. Levitt (1967-)

                                                                                                                Stephen J. Dubner (1963-)

 

It is said that Diogenes, an obviously odd but intelligent man who lived around 400BC, went about Athens’ marketplace with a lamp during the daytime. He claimed to be looking for an honest man. Apparently, he had little luck. We might well assume that a similarly futile search could be made in the nation’s Capital at any time of day. Politicians lie. So it is what they do that should galvanize our attention.

 

Lying is endemic and not limited to politicians. We all tell lies, or “white” lies as we euphemistically call them. Aesop’s fable of the boy who cried wolf warned that when persistent liars do tell the truth, no one believes them – a lesson that politicians, reporters and others should learn. In the 19^th Century, Carlo Collodi of Florence, the pen name for Carlo Lorenzini, gave us the story of the sentient wooden puppet Pinocchio whose nose grew longer when he lied. Sadly, lying noses do not lengthen among those in Washington today. Rather, they believe Joseph Goebbels, the Nazi propaganda minister who said that if a lie is repeated often enough it is perceived as truth – like telling the public that only adherence to a Democrat-led agenda will save the planet from destruction. Climate change is a fact. The planet’s climate has changed thousands of times over millions of years. It will continue to do so. But people’s behavior is just one cause. 

 

While the media has been filled with Donald Trump’s lies, exaggerations and transgressions – and, certainly, Trump is a notorious liar – lying comes naturally to most of those who become politicians. It was Joe Biden who told the world he was arrested when visiting a jailed Nelson Mandela, that his uncle was eaten by cannibals in the Pacific during the Second World War, that he visited “Ground Zero” on September 12, 2001, and, to a Teamsters meeting, that he once drove tractor trailers. Mr. Biden, of course, has the excuse that he is “an elderly man with a poor memory.”

 

There have been other colorful examples: Nine months before he resigned on August 7, 1974 over the Watergate break-in, President Nixon told a group of reporters: “I am not a crook.” President Clinton on January 26, 1998, referring to White House intern Monica Lewinsky, declared: “I did not have sexual relations with that woman.” On September 5, 2002, President Bush told the American people that Iraq had “weapons of mass destruction.” And President Obama, on June 6, 2009, said, referring to his proposed federal takeover of healthcare: “If you like the doctor you have, you can keep your doctor too. The only change you’ll see are falling costs as reforms take hold.” 

 

But consider some of what they did: One of the five “plumbers” (James W. McCord) who broke into the Watergate complex on June 17, 1972 was a member of Nixon’s Committee to Reelect the President. Stains on the blue dress worn by Ms. Lewinsky suggested a definitional difference in the words “sexual relations.” Iraq did not have weapons of mass destruction. And, according to the Peterson Center on Healthcare, the cost for medical care services has risen 49.6% since June 2009, double the rate of consumer prices.

 

Today, we are told that the southern border is secure, yet according to The Washington Post “illegal border crossings have averaged 2 million per year since 2021, the highest level ever.” We are told of extraordinary job creations in the past three years, yet part of the rise has been an increase in part-time employment, as the ratio between full-time and part-time has narrowed since mid-2023. As well, part of the job increases are due to growth in government jobs. J.P. Morgan reported that government jobs gained 56,000 per month in 2023, more than double the monthly gain of 23,000 in 2022. On April 10, President Biden was quoted: “…inflation has fallen more than 60% from its peak…” While that was true, it is also true that in March of this year, the CPI came in at 0.4%, double the Federal Reserve’s benchmark.

 

On September 29, 2023, speaking at the Atlantic Festival in Washington, D.C., Jake Sullivan, America’s National Security Advisor, rattled off a list of positive developments in the Middle East, a result of Biden’s policies: “The Middle East region is quieter today than it has been in two decades.” Eight days later Iran’s proxy Hamas, headquartered in Gaza, launched an unprovoked attack on Israeli citizens, raping, mutilating and killing 1,200 civilians. Mr. Sullivan, in his comments, conveniently ignored the devastating withdrawal from Afghanistan in August 2021, the pursuit of Obama’s Iran Deal, which has allowed Iran to pursue their atomic program, and the reluctance to pursue the Abraham Accords, which had been leading to Sunni Muslims’ recognition of Israel.  

 

We are told that democracy is at risk, if the despised Donald Trump is re-elected. No one doubts that the continuation of our democratic republic is vital to all Americans. But does the much-watched Trump represent the sole risk to democracy? Is there not a risk from those who have gradually (and insidiously) strengthened the Executive branch, especially from those who believe that government knows best? Democracy has proven to be the most equitable political system ever contrived, largely because it incorporates free market capitalism, which provides the economic growth necessary for a nation’s operations, defense, and its social welfare programs. But markets work most efficiently when regulations do not impede innovation and when taxes do not limit investment. Consider what has been done and what is proposed: Forbes reported on December 29 that 2023 that the Federal Register, the daily depository of rules and regulations, wrapped up 2023 with 90,402 pages, “…the second highest tally of all time.” On March 11, President Biden sent Congress his proposed 2025 budget, which calls for a $5 trillion increase in taxes, to come from corporations and individuals making over $400,000 per annum. Barriers to economic growth, whether from regulations or taxes, have unfavorable consequences for all citizens.

 

Nevertheless, we should keep in mind that lies are sometimes necessary. For example, in time of war lies can deceive the enemy, or they can be used to withhold the truth from those near death and who are emotionally fragile. It may be more ethical to lie to help a friend save face in public; and secrets, whether corporate, institutional or government, to remain secret may involve fabrications or even, God forbid, fake news. There have been times when Presidents have had to lie to the public in the interest of national security.

 

But none of these examples exonerate politicians who lie to curry favor, to harvest votes, to further political careers, or to those in the media who aid their ignoble political friends by obscuring facts. Hannah Arendt, a refugee from the deadliest of European lies, once wrote that perhaps political deception is the greatest threat. In a recent Wall Street Journal review of Richard Sennett’s new book, The Performer, Barton Swaim quoted from Yuval Levin’s 2020 book, A Time to Build: “…the presidency and Congress are just stages for political performance art; when a university becomes a venue for vain virtue signaling, when journalism is indistinguishable from activism – they become harder to trust. They aren’t really asking for our confidence, just for our attention.” Sadly, that seems to be true.

 

In 1969, Nixon’s Attorney General John Mitchell said: “Watch what we do, not what we say.” We did. You know the rest.