Category Archives: Inequality

Politics and Spin Over Observation

The March 30th US print edition of the Wall Street Journal carried an Opinion piece titled, “Britain’s Monetary ‘Stimulus’ Has Fed the Pension Crisis“. The article highlights the plight of many firms whose pension funds are under water and how persistently low interest rates have crippled the chances to grow the returns on a number of investment vehicles. This is due to the widening gap between the value of assets and liabilities. The article happens to highlight this plight in conjunction with true fight in Britain over a venerable old British firm, GKN, who has impressively damaging pension liability any suitor needs to accommodate.

The real point of the article however is not really about GKN. It is that the Bank of England recently published a paper that argued its loose monetary policy and massive quantitative easing were in fact good for us. The argument of the report is that things would have been much worse, therefor whatever we have must be better. This is a strange argument. Much research has been published that correlated near-zero interest rates and QE with debt and credit price distortions, record-levels of M&A, record-levels of stock buy-backs, Stu only low capital investment levels, low productivity, and to top it all off, increased inequality. To be fair, if you didn’t watch the news and all those around you, the Bank of England report might be credible. If we had had a real crash, the pain might have been worse for a while, but the economy would have recovered as fast as other recessions due to the lack of credit and debit distortions.

The article closes on a useful warning and observations. Old firms with such large pension obligations and short-falls are suffering from a double-whammy. Such firms have to divert funds to stem the pension fund blessing that might otherwise have helped source the needed growth in the future to pay for those persons. Even if central banks had not kept rates so low for so long and stuff they investor-classes pockets with cheap money, such firms might still be in trouble-or anyway.


The Debt Chickens Are Coming Home to Roost

A story it today’s Us print edition of the financial times highlights a building ‘bubble’ of disquieting proportions. The article, ‘Britain’s Pizza Chain Boom Faces Debt Reckoning’, highlights how a large number of restaurant chains have been snapped up over recent years using debt. This might be by a private equity firm or a leveraged buy-out. In either and other cases, many acquisitions were executed using cheap debt which was facilitated by central bank policies such as near-zero interest rates and quantitative easing (QE), both of which massively distorted the price of corporate bonds and debt. Add to this public policy and pressure on banks to increase loans to help drive growth, you can see signs of a perfect storm.

The UK example is specific, but the problem is wide and applicable to most developed economies. The US has just come off a long-run marathon of high and record levels of corporate acquisitions, again much funded by cheap debt. There must be many organizations hanging by a thread, just waiting for interest rates to nudge up resulting in unsustainable debt burdens and interest payments. Unless growth drives the top-line of these businesses at a faster rate, the chances are many such firms will go to the wall.

This situation was created as an unintended consequence of near-zero interest rates for such a long time and massively price-distorting quantitative easing. Though most governments have ceased buying sovereign and corporate debt, the damage is done. Massive, trillion dollar, balance sheets at central banks need to be unwound in such a way as again, not upset the market. The act of creating the balance sheet did upset the market. In reducing their balance sheets, central banks will do it again.

And the sad part about all this, as it will play out? Smart investors with lots of money and a high risk-tolerance will hedge against such business failures and reap huge rewards. The rich investor-class will get richer, and the poor will just lose their jobs or otherwise miss out. Politicians will have a field day, calling out the failure of capitalism. Of course, it’s not a failure of capitalism since central banks and their policies are not part of any capitalist model: central bank operations are closer to a socialist model where the few take decisions to ‘help’ the many, as if they know better and how to help us.

Oh well, such is life. Just buckle down and wait the storm. The debt chickens will soon be home to roost. Maybe not by this Easter but expect them home by next year.

Trouble for The Eurozone with Trump’s Tax Deal

There was an excellent Opinion piece in today’s Wall Street Journal that calls out the less thought through implications of Trump’s domestic tax deal on international business. The piece, US Tax Reform Has Europe Worried, by Joseph C Sternberg, explores the writings of a German research group that details some thinking suggests some organizations will think twice about new investments in Europe – specifically Germany – with the new US corporate tax rates being leveled. The research piece is from ZEW and is here: Germany loses out in US Tax Reform. This is another dimension not modeled by US economists when they try to determine the impact of the tax reform on US growth.

The more important point however in Mr. Sternberg’s piece comes toward the end of his excellent article. The author suggests that US tax reform highlights a different opinion for taxation from an ideological perspective. This point needs to be talked about more since we have lost our Mojo for ideology in favor of a left-right populist dichotomy. The US reform is being used to alter tax incentives to drive growth, investment and job creation. Most of Europe, with is more socialist (and Democratic-leaning) policies, uses tax incentives mostly as a redistributive process for sharing an assumed pie. There is much less effort in driving growth or influencing investment to grow jobs. This is the dialog we had in the 1980s and it leads to the dialog about big government versus small government.

It is about time ideology got a fair crack again!

The Madness of Student Loans

I read an amazing article in today’s US print edition of the Wall Street Journal. The article was titled, ‘Parents are Drowning in College-Loan Debt‘. The front page article explored data that suggests new record levels of delinquency on college-loan debts associated with a government-managed program called Parent Plus. 

Apparently this program allows parents to borrow money to support educational costs over and above the maximum a child can obtain from federal aid. The article suggests that there is no limit to what can be borrowed via Parent Plus (created by Congress in 1980 when Jimmy Carter was president); and that the most information needed to qualify is a social security ID. Apparently there is no credit check or any other required qualification.

Excuse me? I had to read that part again. What idiot approved this policy? Talk about idiot. This is just the kind of lunatic policy that contributes to unsustainable price increases in secondary education that the droves demand for more subsidies, loans and debts. This is as close to nuts as the same socialist and left-leaning policies that suggested expanding home ownership for those that cannot afford it was a good thing. This is madness.

Not every child needs to go to college. But every child should have the opportunity. There is a distinction between those two points; and the result should not lead to governments controlling access by funneling loans to those that cannot afford it. Attendance should be based on merit. Thus fewer would attend and so prices would not rise as fast and so fewer loans would be needed. But socialism informs uneducated parents that they have a right to a college education and so Uncle Sam has to bend over and make crap up and print more money and screw everyone as a result. Nice.

Now we are again in another financial pickle. But I can’t stop and write about how to fix it. I am going to rush off to go apply for my free Parent Plus loan.

Note to Federal Reserve on Regulations: Step Down

News September 23rd in the US print edition of the Wall Street Journal reinforces how our mad love of regulation will ruin us. In “Fed to Curb Commodity Trading“, we hear of proposed rules that would impose massive capital charges in banks that trade in commodities. The problem being solved is that banks take risks and under excessive condition (i.e. black swan events) such financial firms might put the financial system at risk.

The problem here is that two forces are pitted against each other:

  • The need for risk taking which promises high returns drives innovation and productivity
  • The desire to reduce risk in order to preserve stability and avoid huge loss

Risk involved loss, and not all losses are bad. In fact some would say loss is good (i.e. creative destruction). The current government seems bent on destroying our ability to grow our economy in the name of such regulations. They say these rules are for our own benefit: the result being slower growth, increased inequality, lower wages, and now greater threats from afar.

If you add to this the inexorable growth in government spending, you can see that capitalism is being throttled and socialism is alive and well. The challenge is that no politician today will run on a ticket stating what needs to be done: they would not be reelected.  But I wonder: would the electorate reward a politician that shuts down half the government, for good?  

Turns out global trade is good for you and me

It is all the rage that global trade is bad for the middle classes. We have only just finished consuming the research from the “China Shock” that suggests that the injection of a massive cheap labor pool, represented by China entering the global workforce, may have overwhelmed western governments ability to develop support policies to help transition workers replaced by this China ‘shock’ of workers. As such global trade has been painted as the bad boy, and we are all now looking for ways to protect ourselves from global trade.

Well, it turns out that the China Shock may be a concern for specific industries and disruptions, but global trade overall has lifted the middle classes incomes and not made the richer as rich as we first were led to believe.

In Tuesday’s US print edition of the Financial Times there was a most fascinating article titled, “Incomes study tears up ‘elephant chart’“. The so called elephant chart refers to a graph from research by economist Branko Milanovic who famously demonstrated how global trade created a gap in incomes for middle classes (which went down) at the same time as for the rich (which went up). New analysis of the data suggests this conclusion is wrong and that the gap is much, much smaller and that middle class incomes were not negatively impacted; and Milanovic even updated his original thesis with new data and he now seems to agree with the new review.

The new analysts has found that some of the data used in the original analysis acted as out-layers to the broad tend and by removing that data, the great majority of peoples’ incomes don’t fall. For example, data from emerging markets that experienced accelerating population growth dragged down income data. The large number of Chinese families, for example, made it appear that the US poor were further up the income scale. Other data from former soviet states in Eastern Europe and Japan also caused issues in the data.

The bottom line according to the new analysis is that the middle-class incomes have not been negatively impacted by global trade, but regional differences do exist so analysis needs to look carefully at country specific data. Additionally the rich have not gotten that much richer – in fact the very rich lost the largest proportion of income during the period under review. 

If only our politicians understood this report.  But since its findings do not reinforce their message, it will likely be ignored.