All Bets Are Off

All bets are off (ABAO). What does that mean? It means that we don't know what is going to happen next and we often entertain extreme policies to deal with the unknowable. 

An extreme form of ABAO is what happens during wars. We turn society upside down when confronted by a war. 

World War II drafted our young people and sent them to be killed across both oceans. Japanese people who wanted to live in America were treated as enemies and imprisoned. In the Vietnam War, I had to register for the draft as soon as I finished high school and eventually volunteered for the Air Force rather than be drafted upon graduation from college. Nevertheless I got some lovely green fatigues to wear and an all-expenses paid trip to Saigon in 1972. 

Crazy times for sure. 

As crazy as any parts of the above, is how it turned most of us into liars. Kids, their parents, their coaches, and their teachers were part of this conspiracy of the young. What did we lie about? We lied about anything that had to do with deferments from military service. Some pretended to be in college to escape the draft for a while. I asked a doctor if he thought my feet were flat enough to make me unfit for soldiering. He said no. Psychologists said many of us had mental issues. If there was a deferment or exclusion, we knew about it. 

Local areas had draft boards who decided who got chosen for the draft. Some draft boards had big quotas; others did not. We all heard the rumors about which ones were the most active. Some draft boards included family friends. Not mine!

A giant sense of unfairness lay over the land. That's what we talked about. Who was getting out? Who was getting in? How many of our friends had already died in Vietnam. 

So what? I write about all this because War is a time when ABAO. We become amoral if not immoral. We get very selfish and do and say things we would never normally do. 

I write this because Covid is like a war. The line to get a Covid shot is like the line at the draft office. Deferments in 1968 were like vaccine eligibility in 2021. Who gets the shots? There is a nice list of priorities. Those with morbidities. Then who? Old people. Healthcare providers. Teachers and so on. How many stories have you heard about people trying to falsify or exaggerate their status in one of these priority lists?  

And it is not just people trying to get permission to take the shots. How many ways has Covid and the War on Covid changed work and life? How many of you don't wear a mask or don't distance? How many are tired of the boring life of Covid and go to Florida for spring break? Or how many go to a local bar that clearly lets too many people inside? How many "work" at home and misrepresent what we are doing during the workday?

You can add to the list. The point is that Covid is like another war and like another war, ABAO. We do the best we can for ourselves and that best is often not reflective of a lifetime of moral lessons. Each of us has to decide his own behavior. But make no mistake, when war is upon us, we are challenged and Covid is no exception.

Inflation

 At the bottom of this post is a table with monthly and annual inflation rates from February of 2011 to September of this year. Pretty boring. But there might be a story there. 

I get sick and tired of the press. We all know that Walter Cronkite is gone and with him is gone a rational and unemotional summary of the news. Recent studies say the press exaggerates every thing and mostly they prefer to report bad news. 

Whether the topic is Covid or inflation we get a lot of scary reports. The title of an article in the Wall Street Journal this week reads "Supply-Chain Bottlenecks, Elevated Inflation to Last Well into Next Year, Survey Finds." That's just one of many reports that claim we are stuck with an inflation problem.

I am not going to argue with that possibility but I will say that given today's environment, nobody knows squat about future inflation. Between Covid induced supply-chain disruptions, huge government deficits, and  a new waterfall of money from the Fed, we are in uncharted waters. 

So I decided I would spend a few minutes looking at the inflation numbers. I chose the Consumer Price Index. I downloaded the numbers from the Bureau of Labor Statistics, the government organization that creates and reports these numbers on a month basis. bls.org   I took the raw monthly numbers and created monthly and annual averages. I also took percentage changes so we could view inflation rates rather than CPI levels. The monthly numbers are annualized by applying a factor of 12 to any month's percentage change. 

If you just gaze at the whole table you come away with a notion that these monthly inflation rates look like a hare running from a hungry German Shepherd. For example, inflation was 11.7% on an annualized basis in March of 2011. In June, there was deflation of 1.3%. Wow, that's quite a change. Inflation one month; deflation a couple months later. Don't stare at the table too much or you might get dizzy. 

Covid is believed to have started getting serious in the second quarter of 2020.  Between March and August the inflation rate dives down and then swings up. The average for the full year of 2020 is, however, only 1.4%. It is not until 2021 that we see the inflation getting much higher, with rates between 5.1% and 11.1%. Clearly the chart has changed in 2021. 

But notice that the numbers are still a little higher than average but clearly lower by August and September, 2.5% and 3.3%. The average for 2020 is 1.4%, lower than the previous 4 years. Notice too that the average for 9 months of 2021 is 6.9%. That's much higher than any of the years before. 

We don't have October numbers yet but we shouldn't be too crazy about one month. Look at the table. The numbers swing all over the place. October won't prove a thing. But clearly, if October comes in at around 4%, that number will be lower than most of the months of 2021. 

We should expect a gradual decline anyway. We won't just automatically pop back to 2%. Why? First, thanks to a very loud press screaming and crying about rising inflation, this could easily cause inflationary expectations to rise. Already wages are heading upward. So are some interest rates. Expectations can be self-fulfilling. We expect more inflation and then we get it. 

The other reason why inflation might not drop back down to 2% quickly is government policy. Government is piling stimulus upon stimulus. Soon they will start to reverse engines. But until they do, its hard to imagine inflation coming down very quickly. Notice that now that some supply bottlenecks are easing, retail sales are starting to jump. With interest rates near zero and lots of government income subsidies, it's hard to imagine inflation falling very fast. 

Where is inflation heading? Probably to more of the same jack rabbit ups and downs. Will it get much worse. I don't know. It depends a lot on household expectations and future government policies. If you can forecast those things then you will be the expert. Good luck with that. 

Table. Consumer Price Index annualized monthly and yearly percentage changes.

Death and Taxes

Alan Blinder wants to solve the nation's deficit/debt issues by taxing the rich. It is interesting that in his Wall Street Journal article of September 26, 2021, he says nothing about raising the income tax rate on the rich but prefers to raise revenues with something called carried interest and constructive realization of capital gains at death. I will hold off on carried interest. Today is about capital gains at death. 

Apparently Blinder read something about the inevitability of death and taxes. More specifically he wants to tax rich people on unrealized capital gains but only after they die. It is common in economic models to make no distinction between family members. A family is often assumed to act like a single person. In such models, so long as there are heirs, there is no change in tax liability. It makes sense, your parents earned the money and now you get to enjoy the benefits after they croak. 

Blinder wants to change that. If they had sold assets before death, they would have had to pay a capital gain. Lots of us do that. But if they didn't sell, then they must have had a good reason not to sell. But Blinder does not care about that reason. To Blinder dying is tantamount to selling. You gave your assets to one of your brats. There was never a sale. So there is no capital gain. There is no tax. Blinder is envious. He wants some of the action on your money that you saved and left for your family. 

Maybe you don't agree. Y0u believe those rich devils should share their wealth. You might believe those bratty kids never did anything to deserve all those tax-free benefits. But it doesn't make sense. Blinder wants to tax a transaction that never existed. He looks at the price Daddy paid in 1946 and compares that to the assets' prices upon death. Sounds pretty cool until you realize that the asset was not sold upon death and never generated a penny for the brats. Not a penny. The heirs have some paper financial assets but nothing else. Of course, if they earn interest and dividends or they sell, they will pay taxes on that. 

Just for fun let's suppose the asset cost $100.00 in 1946, $1,000.00 at death, and then $99.00 a week after the death. Hmmm. If the child held the asset for one week, the asset would be worth $99.00 and would generate a capital loss. Why would you want to pay a huge capital gain at death when the value of the asset produced a loss? That doesn't seem correct or fair. True, a contrived example. But also true that death does not create a transaction and death distorts what the heir should pay. 

Why didn't Blinder require that the heirs sell the asset? In that way, we would have a real economic value for the capital gain/loss. In that way, the heir would actually have a capital gain/loss and the tax would make sense. Blinder must be assuming that the heir has a right to do as he/she pleases with inherited assets. He doesn't want to interfere with the heir's right to use the asset but he does want to take a capital gains tax on a fictional gain number. 

Which is it Mr Blinder? Does the heir own the asset or do you? 

Powell Must Be Jealous

As the government debt/debt ceiling issue gets all the headlines, poor Jerome Powell, the head of the Federal Reserve, must have been feeling left out. The Fed has nothing to do directly with national debt so Congress and the President are getting all the attention. Sort of like you getting jealous when your brother gets a spanking. 

Powell and his monetary genius friends told us last week that they can save the day. Reminds me of Micky Mouse flying in to save Minnie in the nick of time. Except in the case of these famous mice, it usually works. Mickey really is the Mouse!

Powell is no Micky Mouse. But he thinks he is. This may take a bit of explaining so please pour another gin & tonic.  Don't forget the lime. When the government has a deficit it means it has to borrow by printing up brand new shiny government bonds. Okay, they aren't shiny but they are new. 

This borrowing process usually works until the times when the government's debt gets so large that people lose trust in the government's ability to stand behind the bonds. That is, you get a nice new bond and a promise of two things -- each year you will get an interest check and when the bond matures you get the principal back. But what happens when you lose faith in the government's ability to pay back?

You wouldn't loan money to Uncle Charlie if you were pretty sure he was not going to pay you back. The same goes for loans to Uncle Sam. All this razzamatazz with government debt and debt ceilings calls into question the government's ability to pay us back. So, of course, we would be reluctant to buy government bonds. 

How do we get to the Fed and Jerome Powell from all this? The answer is that the Fed has a "money printing press." Wouldn't you love to have your own dollar printing press? Well, Powell has one. And that means he can play Micky Mouse saves the day. How?

Suppose none of us want to buy the government's bonds. We think they stink like seaweed. We think we won't get our money back. Well, guess what? If you had a printing press, you wouldn't care about being paid back. So the Fed and Mr Powell will crank the money machine a bit and buy some of those stinky government bonds. Mr Powell will go to Pelosi and say....are you having a nice day dear? How much money do you need? Just say the word and we will buy trillions of dollars of those nice new bonds you are cranking out. Don't worry about selling them to the suspicious and cranky private sector. Old Jerome will buy them all. No questions asked. 

Wow. That sounds really cool. The government incurs a debt and we don't have to worry a bit about it. Pelosi + Powell. Go team. 

What could go wrong? For one thing, it is pretty much illegal. The Fed is supposed to be an independent institution. It is not supposed to have financial handshakes with Congress. Of course, Jerome and friends are pretty sneaky and they can make it look innocent and legal. 

What else could go wrong? Let's think about the incentives created. Mom, I gambled away my allowance last night. Oh, don't worry honey, here's more money. Please don't gamble again. Okay mom, sure. Thanks. Right! If the Fed steps in and buys those government bonds this time -- what about next time? What's to stop the process?

And that leads us to the third problem with the Fed's bailing out the Congress. It means you get a double whammy of stimulus. You get the government spending stimulus and then you get a huge monetary stimulus. Wow. Wave after wave of stimulus when the economy already seems to be healing. That cannot spell anything good for inflation, interest rates, and whatever policy has to be enacted to offset all that.

Powell is not Micky Mouse. His rescue is fake. His rescue will make us all worse. We don't need Micky Mouse. What we need are leaders in Congress and at the Fed who understand economics. Perennial huge debt doesn't work for you, me, or our government.  Instead try reasonable debt. No debt ceilings. No monetizing the debt. No roller coaster economy. Simple.