Occam’s Razor

Are the United States a bad investment?

Back in February I wrote that the United States would be in a heck of a fix if foreign creditors decided to stop loaning us money. Now there is convincing evidence that foreigners are starting to see United States government bonds as chancy investments and U.S. stocks as poor investments.

Today’s Washington Post has an article titled Bearish on Uncle Sam. If it is not alarming it should at least be ringing a few bells. For example the article notes that a September 9th auction for $9B in long term U.S. Treasury Bonds failed to attract any international investors.

In addition U.S. stocks in general are looking a lot less attractive to foreigners. The Post reports that stock purchases by foreigners are down from $9.7 billion in July to $2.1 billion in August. Looking at just who owns our foreign debt should be sobering too. Since 2000 for example the undemocratic and totalitarian Chinese government has purchased $172B of our debt. But lately it has been finding more attractive places to invest its money, including many projects inside China. If one were to look at the United States Government as just another company, increasingly its stockholders are foreigners. The current total federal debt is about $7.4 trillion dollars. Of that “intragovernmental holdings” (the Treasury’s words for our debt held by foreigners) was about $3.1 trillion dollars. In other words foreigners own about 42% of the federal debt. In 1997 foreigners owned about 30% of the federal debt.

In the short term it is unlikely that foreigners will stop investing in the United States. But foreigners may well demand higher interest rates because they may see us as a country unable to live within its means. With federal deficits currently over $1B a day the cost of our borrowing money at all levels in the United States could rise markedly. In the longer term this trend is very bad news. If our country is perceived as living indefinitely off the future it may be perceived as a junk bond country. If the flow of overseas capital stops the government will still probably find the money to finance government. It will do so by offering higher and higher interest rates. And this will mean the capital needed by businesses for expansion will either dry up or also become a lot more costly. And that in turn will mean that inflation will no longer be a mild problem but a severe problem. Inflation will drive an economic downturn that will put people out of work and could slide us into a recession or worse.

The United States is skating on fairly thin financial ice. But except for us fiscal conservatives no one seems to notice nor care. They think, “It can’t happen here. We won’t be another Argentina.” Oh but it can happen here. If our levels of deficit spending continue into the stratosphere and our insatiable desire for cheap foreign goods continues at its current insane levels then the day of reckoning is much closer than it appears. What is needed is some good old-fashioned austerity and modest tax hikes. Leadership, in other words. Unfortunately I don’t see that sort of sober leadership happening regardless of who gets elected in two weeks. Both parties have sold to the public, almost as if it is a right, that we can have our cake and eat it too. Even Kerry is promising more tax cuts for the middle class, not less.

It appears we’d rather live in fantasyland. Most likely sometime in the next four years our day of reckoning will arrive sharply and painfully.

October 19th, 2004 at 08:29pm Posted by Mark | Politics 2004 | one comment

Your Hidden Taxes

Are we all happy with the lower withholding rates and federal tax cuts? This means more money in our paychecks. And that certainly seems good. Otherwise we’d just be giving more money to the government. And for most of us giving Uncle Sam more of our hard earned tax dollars is not something we’d choose to do voluntarily.

And clearly that extra money in our paychecks will probably get spent. That can only help, not hurt the economy, right? But most of us are aware that what the government gives with one hand it often takes away with the other hand. For instance: here in Fairfax County state money to the counties has been reduced due to reduced collections. Revenues from sales taxes are also flat. The pressure on counties is to increase local taxes to make up the difference. I live a desirable spot: close to high paying jobs where land is at a premium. My assessments increase every year. Even though the county cuts the tax rate I end up paying more property taxes every year. This year it will amount to a couple hundred dollars, as it usually does. I don’t particularly like it, but I understand it. Unlike some of my tax phobic neighbors I’m not willing to let the roads deteriorate or to shove fifty kids in a classroom in order to save a couple hundred dollars in taxes.

So most of us understand this painful necessity even if we don’t like it. But a lot of us are unaware of hidden taxes. The best example I can think of happens at the gas pump. And I’m not talking about those federal, state and local taxes tacked on to the price of gasoline.

Doubtless you are aware that gas prices are at record highs. I paid $1.88 a gallon for 87 octane last weekend. Ten years ago, according to the EPA, the average price of a gallon of gasoline was $1.04. Now it is $1.88. Arguably gas prices are still a bargain. It’s hard to find a country in the world where it can be procured so cheaply. To have an accurate comparison today’s prices need to be adjusted for inflation. In 1968 gas cost about 35 cents a gallon. Add inflation and that would be about $1.90 a gallon today. So overall gas costs about as much in real dollars as it always has. The notion that OPEC has us over a barrel of oil is somewhat fallacious. Oil prices have proven to be very inelastic, to use an economics term. Naturally we don’t tend to think of gas prices in those terms. We can spend $3.50 for a cafe latte at Starbucks without giving it a second thought. But we will go out of our way to save a couple pennies a gallon for gas, particularly when prices are as high as they are today. I suspect that the cost of gasoline is actually a much smaller percentage of our budget today than it was in 1968.

But you may have read that OPEC wants to increase its benchmark price for oil. Actually OPEC doesn’t really set prices; that is determined by supply and demand. But they do try to encourage member nations to price their product in a range. And the current benchmark range is $22-$28 a barrel. However with demand high as economies recover the average price of a barrel of crude oil is hovering around $34 at the moment — about as high as it has ever been. Certainly this has an effect on the price you pay at the pump.

But here’s the kicker: oil prices in Europe are steady. How is that possible? Have vast new deposits been found off the coasts of France and Spain? Is OPEC cutting Europe a special deal? The answer is they are paying the same rates as everyone else. But they have an advantage. Oil is traded in U.S. dollars. And the U.S. dollar has been sinking against all major currencies, including the Euro. When George W. Bush assumed office one U.S. dollar bought 1.07 Euros. Today, one U.S. dollar buys .82 Euros.

Taxes on gasoline are much higher in Europe than in the United States. No doubt about that. But let’s assume that taxes were the same. That would mean that the gallon of gas I bought last weekend for $1.88 a gallon could be purchased in Europe for the equivalent of $1.45 in Euros.

In short because our dollar is now weak we pay a penalty. If the dollar had the same exchange rate with the Euro as it did at the start of the Bush presidency, that gallon of gasoline I bought would be priced at $1.55 a gallon instead of $1.88 a gallon. In these terms then the penalty for a weak dollar is thus currently $.33 a gallon. Now of course all things are never equal and currency rates are always fluctuating. But assuming you put 12 gallons into your automobile once a week this adds up. That’s $205.92 per car per year. If you have two cars, that’s $411.84. All because of a weak dollar.

Now you’re probably asking yourself “How did our dollar get so weak?” Again there are lots of factors that influence exchange rates but in this case there is the 800-pound gorilla that makes the other factors rather moot. And that is the United States continues to live beyond its means. To finance our needs, including government, we need money we don’t have. So we get it from overseas. Other countries lend us hundreds of billions of dollars annually. Certainly not all of the federal debt is financed from overseas, but with federal deficits running $300B to $500B a year that’s a lot of dough crossing the ponds so you can have that tax cut. So I think there is a clear link between deficit spending and the fall of the U.S. dollar. Arguably more deficit spending will just make the dollar weaker.

So what does this have to do with taxes? In this case a weak dollar is a hidden tax. A weak dollar has some positive economic effects in making our products cheaper to buy. But it also means that imports cost a lot more than they otherwise would. The current grumbling from oil producing countries is that they are losing gobs of money because oil is traded in dollars. In effect oil-producing countries are selling oil at a considerable discount. This sucks when they want to exchange those oil dollars for their local currency.

But actually we are benefiting. If OPEC decided suddenly to stop selling oil in dollars and demanded, say, Euros instead we’d be in a hell of a fix. That gallon of gas might cost us $2.50.

My point is that deficits do matter, as much as Dick Cheney would argue otherwise. Consequently balanced budgets matter. They drive low inflation and increase confidence in the United States. That’s exactly what happened during the Clinton years. The economy became a self-sustaining proposition. Why? Because that economy was built on the solid foundation of fiscal discipline. (The end of the Cold War certainly didn’t hurt either.)

So maybe if you’ve been to college you are thinking, “Hey this isn’t news. I studied economics. Inflation is a tax.” This is true. It’s also very abstract. We just don’t think of it as a tax. And sometimes, particularly in times of historically low inflation like now, inflation is still there although it may not be obvious.

The Federal Reserve is seeing signs that inflation is making a come back, spurred in part by the rising cost of foreign good and oil prices. We now see that much of this is a result of the low value of the U.S. dollar. As a result the Fed is likely to raise interest rates at its next meeting. And this will be a tax too. Anyone who borrows money will feel the ripples. Money that would otherwise go to buy things will instead go to creditors, the majority of which will probably be overseas. The Fed is trying a little medicine here. Their interest rate increases are designed to keep cause mild short-term inflation at the benefit of reducing the long-term inflation. In the short term the effects may be higher unemployment. It may mean higher mortgage payments. It may mean some won’t be able to buy that first home at all.

My conclusion: there is no free lunch. As much as the Bush Administration would like us to believe it we cannot spend ourselves into true prosperity. We can perhaps live high on the hog for a while, but the piper will have to be paid. If we can stop this foolish deficit spending habit perhaps those glorious economic days of the Clinton 90s can return. But first we need to put people in power again who truly understand economics. It is time to stop buying into the lie that Democrats are big spenders. Republicans, particularly George W. Bush and today’s Republican Party with their lock on all branches of government are the true big spenders. They are charging our national charge card to the maximum and don’t want to pay back any principle.

If you truly value your economic future you should pull the lever for Democrats this fall.

May 6th, 2004 at 08:18pm Posted by Mark | Best of Occam's Razor, Politics 2004 | one comment

Greenspan tries to sober up Congress

This just in: Chairman of the Federal Reserve Alan Greenspan says the government should consider cutting benefits for social security recipients.

Buh wah hah hah! Those of us living in or near Washington know exactly where this idea is going to go. Drag this sucker directly into your Congress’s virtual shredder. Snowballs will survive in hell before Congress reduces social security checks.

Oh they may get cut in less visible ways. Perhaps the retirement age will be allowed to gradually creep up again. This sort of a creative accounting technique is familiar to us federal employees. We’ve seen it before when it came time for our cost of living raises (”Let’s just move the date a bit and drop the costs into another fiscal year. We’ve just saved tens of billions of dollars!”) Put an older retirement age far enough in the future and most people likely won’t complain because they are too far from retirement to raise a fuss.

But even these tricks won’t seriously solve the problem of all of us baby boomers planning to retire soon. All Alan Greenspan is really doing is reinforcing that those fiscal chickens are coming home to roost for Congress as well as for the Bush Administration.

Remember in the 2000 campaign Al Gore proposed putting a lock box on the social security trust fund? It seemed an idea on which both sides could agree. Until, of course, we went into recession, 9/11 occurred and we started to give obscene tax cuts to the wealthiest Americans. Then it became important to show that our deficits were not as bad as they looked. So of course the government “borrowed” from the Social Security Trust fund. It did this by depositing its wonderful IOUs into the funds account with a promise to pay back the money with interest some time in the future.

What does this mean? Well, in actuality the social security fund is currently running a surplus. The surplus was $164B last year. Assuming the same surplus this year, and assuming Bush’s plans for a $521B deficit this year are correct (they are likely to be larger when the supplemental spending bill for the Iraq occupation and reconstruction is introduced) this means that the real government’s operating deficit for this year is going to be at least $685B.

But the surplus in the trust fund is projected to continue to shrink until the baby boomer retirements reach critical mass. At that point the fund begins to run a deficit. That’s when we borrow a lot more money, raise a lot more taxes, cut benefits to social security recipients or try some combination of all of them.

Unless we radically change our representation in Congress the federal government is going to be borrowing a hell of a lot of money in the future.

Yes, we will borrow in mega quantities, but only if we can get anyone to lend it to us. Have you looked at the value of the dollar against other currencies lately? Today one Euro is worth $1.25. A year or so back a Euro cost around eighty cents. There are short-term benefits from a low dollar. It makes our products cheaper to purchase and has a stimulative effect on our economy. But the long-term trend is not good because our financing is largely coming from overseas capital. In fact a lot of this money is coming from other governments anxious to make sure their currencies and their products don’t get too expensive. By buying dollars they are in effect taking their capital and putting it to work in the United States, instead of in their own country where it might otherwise be used. But at some point our deficits may become so bloated that foreign investors lose confidence that they will get a return on their investment.

If that happens our house of cards falls. Countries say “Well, no point throwing our good money after a bad return, we’ll use it ourselves.” If the United States cannot borrow enough money from overseas to finance its deficits then the government must drastically increase interest rates to attract domestic money. And when that happens money becomes more expensive for businesses and consumers to borrow. And that most likely has severe and negative consequences for our economy. The worst result would be a wave of inflation and economic stagnation, recession or depression familiar to many countries in South America, but not seen here since the Depression.

Greenspan is being a good fiduciary. We need someone to impartially tell us the truth. Our government must change its ways and stop foisting off costs of these magnitudes on future generations. It’s really sad though that instead of being responsible our government will tinker around the edges a little bit but do nothing to really solve the underlying problem. Congress can’t say no to anyone. Not to the businesses that finance their campaigns, not to us constituents who want more federal benefits, low taxes and increased services, and not to the president who wants to please his party base and reward his cronies.

The smart investor should be quietly moving more funds out of American companies and into solid overseas growth companies and funds. Unfortunately, even that is not a great hedge. And that is because if the American economy tanks, so will most of the world economy.

So the health of the world economy is in large measure dependent upon whether our Congress can stop pandering and start swallowing the castor oil.

I don’t wish to sound bleak but really: God help us. For those who believe in the power of prayer it’s time to go into prayer overdrive.

February 25th, 2004 at 08:28pm Posted by Mark | Politics 2004 | no comments

The chickens have come home to roost

I must confess I am enjoying Bush’s decline. Finally the American people are waking up from their lethargy. Now that we are awake we are realizing that this Bush presidency has been a disaster on pretty much every level. The press is starting to analyze critically what this president is saying. Finally even Bush’s conservative base is waking up and discovering they put into office a man who is not the least bit fiscally conservative. In fact, he’s increased discretionary spending more than any president in recent history. As a nation we seem to have finally sobered up. Now we can see that our house has been trashed, the neighbors are pissed, the air smells bad, the roof is leaking and our charge card has been maxed out.

It’s been a long time coming. Only now is the glow of the post 9/11 commander in chief truly fading. For the first time Bush is polling at or below 50% approval ratings. Most Americans would rather elect an unnamed Democrat this year than Bush. Bush’s likely opponent John Kerry is polling six percentage points above Bush in a hypothetical election match up.

We can now pinpoint the day when the deck of cards finally fell: January 28th, 2004. This was the day that our former chief arms inspector David Kay (having spent months in Iraq searching for weapons of mass destruction that did not exist) told the Senate Armed Services Committee that our emperor had no clothes. It was one thing for a politician to criticize the president; a politician could always be portrayed as partisan. It’s another thing when Bush’s right hand man on the issue candidly admitted that he and everyone in the Bush Administration had been spectacularly wrong. The American people reacted strongly. It was as if as a nation we were all saying, “But you said there were weapons of mass destruction there! We were lied to!” Within days Bush’s poll numbers sank six to eight percent. Bush’s strong leadership on national security was shown to be so much spin and hot air. The American public is pissed.

With the blinders off we can now see lots of truths that we swept under the rug. For example, during Bush’s tenure we’ve lost (mostly for good) two and a half million jobs. We realize now that Ross Perot was right on NAFTA. The great sucking sound we hear is now our high tech jobs being outsourced in India. We are realizing that we can look forward to a future of being a nation of Wal-Mart greeters, one of the few jobs that can’t be outsourced. We realize that instead of job growth, the unemployed are playing a very large game of musical chairs. We realize from callous remarks from Bush’s own chief economic advisor that this administration holds the American worker in contempt.

In addition we’ve looked at our general ledger and it looks really bad. We went from the biggest budget surpluses in history to the largest deficits. We realize one of the primary culprits was the obscene and repeated tax breaks we lavished on our richest citizens who didn’t need them. The economy rebounds but jobs do not. The oligarchy swells in wealth; and the gap between rich and poor accelerates. Health insurance for seniors gets passed only when Republicans insist on minimal competition for the drug companies.

Meanwhile the numbers of Americans without health insurance continues to grow. Those of us who still have health insurance pay increasingly astronomical costs. The Bush Administration’s response is to try to set up Medical Savings Accounts. If only the average American has the disposable cash to put in these accounts in the first place. This is particularly hard to do when you’ve been reduced from IT Worker to Wal-Mart greeter or 7-Eleven clerk.

As Rod Serling might say: “Portrait of an Administration out of touch with reality.”

Last year I suggested Bush was a one term president. I argued that the long term trends just didn’t favor him. I am glad the American public is beginning to agree with me. Bush cannot erase two and a half million jobs before the November elections. He can’t turn Iraq into a success story. He can’t win back by November all the friends we lost internationally in our reckless pursuit of a preemptive war. He can’t turn around $530B annual deficits. And he can’t provide more citizens with health insurance by giving those who can already afford it Medical Savings Accounts.

The chickens have come home to roost. The law of karma has not been repealed. Bush will lose this election. My fondest hope is that it causes the American public to do a wholesale reevaluation of Republicans in general. People who manage this badly do not deserve to represent us. Let us hope against the odds that we not only get a Democratic president again but a Democratic congress as well.

February 17th, 2004 at 09:23am Posted by Mark | Politics 2004 | no comments

I’m a fiscal conservative!

Yes, as hard as it is to believe I, a good liberal, am a fiscal conservative! I realized this yesterday when I read stories of President Bush rushing to Ohio to push for his $550B tax cut, calling a few Republican senators like neighboring Senator George V. Voinovich of Ohio weenies for agreeing “only” to a $350B tax cut.

All these tax cuts are in addition to massive tax cuts made over the last few years. Those tax cuts were made to make the economy grow. They didn’t seem to do the trick so naturally we need more and higher tax cuts that will do the trick. How deep do we want to dig our own grave? The economy is not improving George. Maybe it’s because of the reckless way you are steering our economy? Well, duh!

Let’s look at what worked. Let’s look at your father who also fought a war against Iraq but failed on the economy. He lost reelection largely because he didn’t do what was needed for the economy and us citizens, who were sick of high unemployment. Bill Clinton came in to office. Did he cut taxes right and left to stimulate the economy? No, in one of those increasingly rare shows from a politician, Bill Clinton developed a spine and did the right thing. He got a marginally Democratic congress to approve tax increases that were needed to bring the government’s expenditures in line with its income. I don’t think a single Republican voted for them.

What happened? Maybe it was just coincidence, maybe it was all those low interest rates but Wall Street got confidence and the economy improved. It seems that not knowing from year to year how much money the government is going to borrow is bad for the economy. Business likes to have reasonable certainty about capital. We all know the rest. During Clinton’s eight years of pragmatic leadership the economy boomed, tax revenues poured in, deficits dropped and record surpluses emerged.

One would think Bush and his Republican party would learn from the experience but no, it’s back to cut those evil taxes while spending more and more. And let’s have faith in his, his father’s and Reagan’s voodoo economics that we can build a prosperous economy through deficit spending. This is Keynesian economics, for crying out loud. Bush and the Republicans are advocating the same sort of logic pushed by JFK. Is there role reversal here?

I’m a fiscal conservative. I am by no means anti-tax. I think taxes pay for us to have a civilized society and I think civilization beats the heck out of the alternative … look at Angola for a sterling example of the benefits of zero taxes. However I do believe the government should live within its means. Yes, I think we probably should have national health insurance and it will cost a lot of money. So let’s find taxes to make it a reality. But if we don’t have a political consensus to do it then it let’s certainly not borrow the money and spent it anyhow.

In just a couple years we went from record surpluses to record deficits. Unbelievable. Yeah, there’s a war on but even factoring in the cost of the war these deficits would still be in the stratosphere. It was those unwise tax cuts, George. But another $90B down payment to rid Iraq of weapons of mass destruction it apparently didn’t possess didn’t help either.

Hey, let’s all follow the government’s example. Here is real leadership for you. You have vital needs too. The United States needs to protect its national security. You need to protect yours. You need, for example, an armor plated SUV just in case of a terrorist incident. Don’t have the money now? No matter, charge up those credit cards to the max. No sense in being unprepared. Oh but wait a minute you also deserve a break today. You work too hard, poor dear. You don’t need that full time job. Cut your hours. Make it a 32 hour week instead of a 40 hour week. You deserve it.

That’s what Bush is doing to the nation. We are simply living beyond our means. If your income were cut you would probably feel it might be wise to cut back on frivolous expenses. Perhaps you would defer that armor plated SUV purchase, or maybe target more modest expenses like going out to dinner or the cable TV. You might look at used cars and a cheaper apartment. Not the US of A. We want it all first class! We deserve it! And if we don’t do it one of our neighbors across the channel will get that armor plated SUV and maybe pick a fight with us and then where will we be? Horrors! (Never mind we spend more on “defense” than the rest of the world combined.)

Enough! There is no free lunch, folks. It works the same way for the federal government as it does for the rest of us. Republicans are hoping with enough chants and incense their deficit spending will buy us prosperity, even though the evidence is scant it has worked in the past. This is about ideology; it is not grounded in much economics and it certainly isn’t grounded in the real world. Maybe in a way it’s just naked vote buying: give people a big enough tax cut and they’ll overlook those massive, record deficits they will have to pay with interest later. But maybe it is time for the government to go on a diet because its income will be lean until the economy improves. But hey we can’t go on a national “diet” while porking out every night with all you can eat specials at the Red Lobster.

You will get the government you pay for. If you want more government then cough up more taxes. If you don’t want more government, pay the price and drive on crappy and congested roads and let services lapse. But you can’t lower your income and keep spending for very long and not have problems pop up elsewhere as a reaction to it. We’re seeing it now in the form of a flat economy and a business climate full of uncertainty. And that’s because what purports to be our leadership is out on the quarterdeck drinking the evil rum of don’t tax and spend more instead of competently steering the ship.

Come 2004 we the citizens must sober up and throw these winos off the poop deck. We need new and sober management.

April 25th, 2003 at 02:13pm Posted by Mark | Politics 2003 | one comment