The S&P Express: Off The Rails or on Schedule?

Is the stock market over-valued? Are recent ups and downs the warnings of a weak future stock market? Can you overcook frog legs? Stockholders want to know answers to these questions.

Trying to forecast the future direction of the stock market is more impossible now than ever. So I am giving up on that and will try to explain why below. It is perfectly okay to punt on such things. Sure, there are snake oil salesmen who will forecast quite assuredly on any day at any time. But as they say – you gotta know when to say when. This stock market is wandering like an office worker on Tuesday night in Gangnam after one too many Soju.

I am going to use the S&P 500 index for my discussion below. I could have used any other major stock index and come to the same conclusions. Essentially these indices track stock prices of the largest American firms. They are measures of “da market”. The S&P 500 tracks the 500 largest US companies.

Today’s blog is more about the data and less about the theory.  I usually like starting with theory because it makes sense. For example, a stock is supposed to measure the value of the company. If investors believe that a company is doing much better these days and it has higher profits to prove it, then more people want to buy that stock. 

They buy it because they anticipate the company might issue dividends to the stockholders or they think the price will rise higher in the future. As they buy more of that stock the price often rises until the point at which people feel the price is high enough relative to its rewards.  If we are looking at the S&P 500, it often rises when the whole business sector is doing better – meaning more dividends and higher expected stock prices across the largest and most representative companies in America.

Stock prices may rise for many reasons. You might be unhappy when your local bank lowers the interest rate on your saving account to .00003%. So you take money out of that account and buy a share of the Jack Daniels Company. Any local or global event that induces investors to redirect assets away from other investments and into US stocks can cause the S&P 500 to rise.

That’s the end of my maco-finance lecture. The reason for reviewing some of this theoretical minutia is that there is plenty of difference of opinion about the future course of the stock market based on theory. There is ALWAYS plenty of difference of opinion among theorists about the market. There might be more now than usual but it seems to me the overpowering case for stock price uncertainty is not the theory. I think it is in the numbers.

Let’s suppose you have a friend and his name is Mabby. Let’s suppose Mabby weighed 150 pounds for the last 17 years. Knowing nothing about Mabby you might be quite confident that next December Mabby would weigh about 150 pounds.  Now supposed you had another friend named Abbmar. Abbmar weighed 150 pounds a year ago. Last December he weighed 350 pounds. In March he weighed 200. What is your best guess as to Abmar’s weight in three months? I am guessing you would have a lot of uncertainty about that prediction and you wouldn’t bet a lot on its accuracy.

That’s the way I feel about the S&P 500 right now. Most graphs of the S&P compare its value today to what  is was recently. Most geniuses compare it to a low point in 2009. Since then it has oscillated quite a but but the main story is its upward trend. But that little bit of history is very misleading since it looks at today relative to a recent low value.

So I decided to look at the S&P 500 going back to when it was just a little pup in 1950. I deflated all the monthly values for general inflation because you cannot compare apples and oranges or something like that. Then I graphed it. I could have calculated a bunch of really cool statistical numbers but sometimes just looking at the graph is enough. See the Chart below. (Note: The S&P 500 value today is approximately 2100. But when you deflate it by a CPI value of about 234, you get a number more like 8.)

·        From 1950 to about 1968 the real S&P 500 rose from a value of about 0.75 to about 3. The line looks pretty smooth despite there being plenty of ups and downs over those 19 years.

·        From the end of 1968 to the middle of 1982 the market was generally declining from about 3.0 to a low value of about 1.0. So we had about 15 years of a downward trend.

·        Then we had another time period of S&P expansion with few major downturns from 1.0 in 1982 to a value of almost 3.3 in early 1994. It took about 13 years but we got back to an old peak value of around 3.

·        In short we had three long cycles from 1950 to 1994 and the market value rose from about 1 to 3 in those 45 years.

·        Then it gets really weird. The S&P started drinking too much JD.  The real S&P 500 almost tripled from about 3 in 1994 to almost 9 in early 2000. The market dove from that peak of near-9 in early 2000 to just above 4.5 in early 2003. It reversed and went to above 7 at the end of 2007 and then to about 3.5 at the end of 2009. It is closing now again on 9. Are you seasick yet?

What can we say? First, we used to have long term trends in market direction that lasted for a decade or two. Now we have significant directional changes that last for at most a handful of years. Second, with those rapid direction changes go large percentage changes. A statistician might say that the standard deviation or variance has increased. Others might say the data is much more volatile lately. No matter how you say it – the market seems very unpredictable right now. 

Finally, even with all this craziness – it is not  easy to know what the most relevant previous peak is. The market hit 9 twice so maybe that is the new peak. But those peaks came after some unique situations and may have involved bubbles. One recent peak was squeezed between the 9s – of about 7.5. Today we are well above that one. There is also the previous high level of about 3. If that is the relevant peak then the market has a lot of room to fall in the future.

Being at or near the highest of the past peaks makes it hard for one to forecast anything good for the future value of the real S&P 500. So I did one more thing. I drew a line of constant 5% real growth from the peak value of 3.0 in 1994. ( See the red line on the chart below.) Today that 5% constant growth line produces a trend value of about 9.2 for the real S&P 500. Thus if we just erased a lot of crazy ups and down of the last 22 years and replaced all that with steady real growth of 5%, we would be at a value similar to what we experienced last week in the real S&P 500. In one year, it predicts a S&P 500 value of near 9.7.

So there you have it. Numbers don’t lie or do they? Much of my analysis suggests we could be in for a significant decline in the stock market. A trend analysis suggests the opposite. Of course, much depends on the theory. Are we really back to theory again? 

The Dollar Will Continue to Soar

There is probably nothing as widely quoted and least understood as the value of the dollar. It is sort of like your cell phone. Even children and grandparents have cell phones but most of us think there is a little Genie inside the plastic cover that makes calls by plugging little wires into large circuit boards.

Those of you who are not on a JD binge might have noticed that the value of the dollar has being soaring like Al Roker on Adderall. So let’s step back and try to understand what all that means.

The value of the dollar means nothing until we say – relative to what. A dollar has value as something beyond wall paper when you can trade it for something. You could trade your dollar for a Bo Jackson baseball card. $202 will buy one of those on the Internet right now. Or you could use your dollars to buy gold. An ounce will set you back about $1100 recently. You often use your dollars to buy JD, bread, toilet paper and other essentials of life. That cost is indexed by the Consumer Price Index whose value is 235.

Whenever the cost of the CPI, gold, or baseball cards rises - it takes more dollars to buy one of those things. Alternatively, a single dollar buys less – or it has less value.  Main point – the value of the dollar rests in its potential to buy things. When prices increase the value of the dollar falls – when prices decrease the value of the dollar rises. With oil and other prices falling in the US – you could say the value of the dollar has been rising relative to many goods  and services.

But there is more to this mystery. Another and equally frequent comparison is how the dollar trades for another foreign currency. We all know that most countries have a currency. We have the dollar but other countries use pulas, pesos, yens, wons, euros and so on. We can track how many dollars trade for these and other currencies. 

Recently a dollar could buy 121 yen. A year ago it could buy only 103. Thus we say the dollar increased in value over the past year because it now buys 18 more yen. That’s an appreciation of the dollar relative to the yen of 17%. The dollar rose in value against the euro by more than 20% in the past year.

A 20% change in the value of the currency if continued could cause major changes in the economic environment. When the dollar is stronger…

           

             It buys more euros and yens

            Thus if prices in Europe are quoted in euros and in Japanese prices are in yen and those prices remain unchanged, then a rising dollar is able to buy more European and Japanese goods.

            Likewise, Euros and yens can buy fewer dollars and so that means that Europeans and Japanese citizens find US goods and services more expensive.

            A 20% increase in the value of the dollar (decrease in the value of other currencies) thus tilts the incentives for buyers around the world. The tilt of a stronger dollar is to buy more of the cheaper goods in other countries and fewer of the more expensive US goods.

The above is the main reason why US policymakers face several dilemmas. US firms and labor unions will complain that the strong dollar is hurting their foreign sales. If this trend keeps up you can bet that more will be known about how US firms are losing competitiveness against global companies. Some will worry that all this will be enough to slow overall national economic growth. Thus policymakers will have to pay attention.

The value of the dollar – like any value – cuts in many directions. When the price of eggs rise, consumer hate it but you have to admit that egg sellers love it. A more powerful dollar means that US consumers, including companies, will be paying less for goods they import from other countries. So if you are used to buying electronics or clothing from abroad, it is likely that the prices of these items will be reduced. Companies that buy materials and equipment from abroad will also pay lower dollar prices. They will enjoy the ability to either expand sales at lower prices or increase profits. Like the price of eggs example – the rise in the value of the dollar helps some folks while it creates challenges for others.

            

Speaking of challenges it is important to keep in mind that US exporters do have options. The price a foreigner pays for US produced goods is also determined by the local price in dollars. So US firms harmed by a rising value of the dollar can recapture foreign customers by lowering the domestic price. This could harm revenue and profits but it does minimize the loss of global competitiveness.

I see it is nearing time for my JD break though there is much more to this story. So let me try to condense it. The rising value of the dollar is mostly the result of a redirection of world demand toward US assets. When the globe buys more US bonds, stocks, and bank accounts, this increases the demand for the dollar and its value. This geographical tilt in purchases of assets is caused by two key factors: monetary policy and economic growth. World investors are pretty sure that two things are happening and will continue to happen for a while. First, central banks in the EU, China, and Japan are determined to lower interest rates in those places – while the US Fed is recognizing that rates will have to rise in the USA. Second, the rest of the world is struggling with economic growth as the US economy improves.

The point of all this is that the value of the dollar is not going to reverse its upward trajectory any time soon because asset return opportunities favor the US. So we better get used to a rising dollar. One of my equally elderly colleagues told me at lunch this week over a lovely bowl of prunes that he could easily see dollar parity with the Euro in the near term – meaning the dollar may rise even more before it stabilizes. 

50 Shades of Grey: The Economic Report of the President 2015

A colleague of mine whose Stage Name is Dr. Bobby J alerted me to the fact that the Economic Report of the President (ERP) was published this February.  The ERP2015 is the latest in a long line of such annual reports that are widely available since 1995 when I was just a macroeconomist in diapers. Here is what the web site says about this annual publication: http://www.gpo.gov/fdsys/browse/collection.action;jsessionid=FKpBJ8tDXS8K1LZ8TlQvpC8sD7VGYWcnJs3yWr3DfJ2wXPJhXlJG!-1529450296!-1448731224?collectionCode=ERP&browsePath=2015&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=0
 

The Economic Report of the President is an annual report written by the Chairman of the Council of Economic Advisers. It overviews the nation's economic progress using text and extensive data appendices. The Economic Report of the President is transmitted to Congress no later than ten days after the submission of the Budget of the United States Government. Supplementary reports can be issued to the Congress which contain additional and/or revised recommendations. Documents are available in ASCII text and Adobe Portable Document Format (PDF), with many of the tables also available for separate viewing and downloading as spreadsheets in Microsoft Excel (XLS).

I know – I am putting you to sleep. But for those of you who like to keep up with the economy, let me recommend this 414 page document for several reasons. First, it always contains an analysis of the past year and a forecast of the future economy. The 2015 ERP doesn’t say a lot about 2015 but does have a very complete forecast of the US economy for the coming 10 years. While you might not agree with the forecast, at least you see its composition and causal factors. 

Second, the document is full of historical data. There are charts, tables and figures in each chapter. Even better is the appendix which houses 26 historical tables. The latter makes it easy for you to research questions relating to past inflation, past unemployment rates, and so on. The 26 tables have just about everything you could want from GDP to wages to ownership of government securities.

Finally, the body of the report has several chapters that look into what the current administration believes are key economic issues and goals. The ERP2015 has chapters on Challenges in the US Labor Market, Business Tax Reform, Economic Benefits and the Foundation for a Low-Carbon Energy Future. These chapters contain the explanations and defenses for the Administration’s new budget proposals. These chapters are, of course, very political, biased, and incomplete.

50 Shades of Grey is a movie that my mommy won’t let me see. But I did some research and found that the term “50 shades of grey” has an interesting meaning. It means that any issue may have a lot of facets to it. And one can believe that because the issue is so complicated and multifaceted that one cannot easily come to a simple binary conclusion about it. Thus all the shades of grey mean  you can’t summarize an issue and say it is right or wrong; good or bad; hot or cold. Apparently there is something in the movie about whips and chains but I won’t go into that.

Interesting in the ERP2015 is the whole issue of income distribution. As we know, President Obama is very keen on improving income distribution. His speeches and what you see in the various chapters of this volume constitute a case for improved worker earnings. He also favors entitlements for the poor and middle class and higher tax rates on the rich as means to attain income equality.

While economists might favor the goal, some would argue about the means or ways. Some economists point to a trade-off between income equality and national economic growth. Others worry that Obama’s approach would create a larger and thus riskier national debit.

ERP2015 adds fuel to this discussion. The writers noted that there are three salient facts about US  economic performance – slowdowns in US labor force and productivity and widening of the income distribution. So the President’s economists did an interesting analysis. They asked what might have happened to the nation’s average income if each of these slowdowns had NOT occurred between 1973 and 2014. By doing this exercise we get some insight into the relative importance of each of these three problem areas. The shades of grey are:

            If the labor participation rate had not fallen, incomes would have risen by an additional $3,000 per person.

            If the income distribution had not fallen, incomes would have risen by an additional $9,000 per person

            If productivity had not fallen, incomes would have risen by an additional $30,000.

Can we conclude anything from this exercise by the President’s economists? I think so. While we could have raised incomes with policies that increase labor participation or income equality, the big dog in this contest is productivity. High productivity alone would have increased incomes by 58%. Productivity accounted for 72% of the improvements brought by all three factors. Economists do these kinds of analyses all the time but they are not beyond criticism.We have to recognize that this analysis is counterfactual. We are asking what might have happened in the past had one or more factors behaved differently.  Much depends on the models used. One could criticize this analysis on many counts. Even if the conclusions are correct for the past, that does not mean the same effects would be generated in the future. 

With these caveats, the black or white part of this is the overwhelming role played by productivity in increasing national income. This does not say that policies for income redistribution are wrong or bad – but it does establish a clear pecking order as we think about  the future.

While ERP2015 is clear about policies to improve these three factors as a means to increase national income, there is a clear bias in this report. The bias is in using government spending and regulation to enhance productivity. Another bias is ignoring any adverse impacts of income equality policies on productivity growth. Almost totally silent in these 400+ pages is any discussion of the known and published long-term increases in national debt – and how increases in national debt in the decade ahead will be a drag on national income.

Unrestrained entitlements, aggressive family-friendly workplace policies, expanded regulatory zeal in health and energy, and half-hearted business tax reform contribute to an environment of rising government debt and business uncertainty. The President is right to place his focus on rising productivity. But the debate is not so much about the goal but on how you get it. Too much policy emphasis on income inequality if it does have the above trade-offs promises to hurt all Americans. A more complete and less biased approach in this book would have been refreshing. 

Republicans Barking up the Wrong Tree On Trade and Money

The Republicans want to give the President fast track authority or what is also called Trade Promotion Authority (TPA). The Republicans also want Congress to have more oversight over the Fed. For a party that wants to limit the power of the President and the other party, these are very odd policy preferences. It is just fine to want more free trade and better policy from the Federal Reserve, but it seems to me they will get neither. Better to leave things as they are – at least until Republicans have more power and control.

Since the NAFTA in 1994 the US has signed Free Trade Agreements with 10 countries and one with Central America countries. Only three of the agreements – with Panama, Colombia, and South Korea – were signed during Obama’s terms of office. None of them amounts to more than a pile of pinto beans.  Even more interesting is that the so called Doha Round otherwise called the Big Momma of Free Trade Agreements has gotten nowhere. The World Trade Organization brings together 157 countries with the goal of reducing trade barriers and increasing world trade. The talks for the latest round of negotiations started in 1997 and a framework was finally agreed in in 2004. Yet despite continued work and much talk there has been no agreement. I have not seen any selfies of the President pushing for the completion of Doha.

In short, the President nor anyone in his party has a burning desire to consummate a chicken soup or a real free trade agreement. As in many other policy areas it is beneficial for a politician to say they favor freer trade, free trade agreements, and Mother Theresa but giving President Obama more freedom to negotiate a free trade agreement is like giving him authority to reject Islam in a mosque. It just ain’t gonna happen.

And Republicans ought to be smart enough to know that any free trade agreement that Obama supports will be something repugnant to most Republicans. One reason is that we are talking about Obama, the same guy they disagree with on almost everything! Another reason is so-called side-agreements. It is one thing to get a country to lower its trade barriers so that US goods are more easily sold there. But it is an altogether other thing when we have to reciprocate. Is Obama really going to advance an agreement that ends up reducing jobs of US steel workers? More imports from say China is always met with howls from Democrats about US jobs lost, environmental damage, and unfair practices of egg drop soup manufacturers. Addressing all the social and other collateral damages of a free trade agreement generally makes them impossible to approve and afford. Bill Clinton was able to escape many of these extras or else NAFTA never would have been successfully approved. Any FTA that the Democrats promote will be one that Republicans will kill or vice versa.  So why give Obama the power to move forward? 

Finally, I cannot image a worse time for countries to agree on trade. The EU is economically weak and its member countries are at odds with each other.  Asia is not exactly a love fest either. How about getting Putin, al-Assad, and Ukraine to sit at a free trade negotiating table? Worse, the US dollar is rising in value while most other countries are seeing currency depreciation as an important tool of demand stimulation. If Obama’s people harp on anything – it is how unfair foreign currency depreciation is to the US. So we will begin trade negotiations with the US wagging its finger at China, the EU, Brazil, and many other countries. Is this really the way you want to start a free trade negotiation? I don’t think so.

Larry take a big swig of JD. This gets us to proposals to shackle the Fed. After all we know the Fed is just a front for numerous conspiracies forged by rich people. Or else it is a liberal lapdog. But please think a moment, my legislative friends. Are you serious about having our democratically elected representatives have more supervisory powers over the Fed? These duly elected representatives are the same guys and gals who think that the best way to run a government is to shout at each other. If that doesn’t work then they shut down the government. Do we really want to give those guys the power to decide about monetary policy each month?

This is what is wrong with Republicans today. There is plenty to do without thinking up extraneous things. Giving President Obama fast track authority will either backfire or end up doing nothing. Giving Congress more power over the Fed is like giving the keys to the inmates (no insult intended to real inmates).  

Time and the Cost of Waiting in a Democracy

I couldn’t decide when to write this week’s blog post. I could do it right now (Friday) and free up the weekend for dancing like Zorba and drinking like Putin.  Or I could wait until late Monday night and do it at the Varsity like my roommate Jim K did his homework back in 1965. I was never good at procrastinating and went ahead and starting writing this on Friday. That decision made me think of other timing issues. For examples see some of my favorites below and feel free to write in your own:

·        Pay our national debt now or maybe later?

·        Fight ISIS now or maybe later?

·        Allow most illegal immigrants a route to citizenship now or maybe later?

·        Turn in your elderly husband now or maybe later?

·        Discipline your child holding the screwdriver near the electrical outlet now or maybe later?

·        Vigorously attack global climate change now or maybe later?

·        Replace your 1963 Lada now or maybe later?

·        Stop Putin’s geographic aggression now or maybe later?

·        Cheat on your income tax this year or maybe later?

·        Open up a personal saving account now or maybe later?

So you get the drift, right? Isn’t it amazing how so many of our most pressing decisions and challenges revolve around WHEN to act. It is not a simple yes or no. We know acting is important but the question is when.

Luckily economists who got tired of macro and location theory pioneered a concept called the "cost of waiting". Unluckily for us, most of these models are framed in models that require an abacus and very advanced mathematical knowledge like foot stomping. So let me just outline the basics of an economist’s theory about the cost of waiting.

First, we assume that there is something that needs to be done. Let’s call that – taking your dog Rufus for a walk.

Second, we assume that we have some leeway as to when Rufus gets his exercise.

Third, there are benefits associated with waiting until later. For example, you just poured a lovely JD and you don’t want the ice cubes to melt and water it down too much. After all, the JD people went to a lot of trouble to create that lovely taste. Also, you are watching the Ellen show and you heard that LL Cool J is coming on soon wearing a short Kilt.

Fourth, there are costs associated with waiting. Rufus is walking around in circles for a good reason. He has to pee right now. Rufus cannot take himself for a walk since that violates HOA rules. And you are the only one who can clean that expensive room-size woven Persian rug.

So there you are – you are now an expert in cost of waiting models. And you realize you can make a truly objective and life maximizing decision by measuring and comparing the extra costs versus the extra benefits of waiting one more minute. Here are the three decision rules:

            If the extra cost of waiting one minute exceeds the extra benefit, then go now.

            If the extra benefit is greater than the extra cost of waiting one more minutes, then wait at least another minute.

            If the extra costs and benefits of waiting one more minute are equal, then kiss your dog, pet your wife, and say goodnight Dick.

So here is my question. Of the issues I listed above, to what extent do any of the arguments you hear and read focus on anything close to a real analysis of the costs and benefits of waiting? Or to put it another way – if the main arguments do not fit the model, then what do they fit?  This is where ideology comes in – and causes a real mess that prevents a real solution.

Let’s take climate change. Liberals want much more done right now to stop climate change. They refer to models that show dramatic negative consequences of waiting too long. Do they ever discuss the benefits of waiting? Do they assume these benefits are all zero? Or do liberals simply assume they are negligible. Maybe liberals would be more believable if they even pretended to act as if this were not another ideological preference.

Conservatives like me are pretty vocal about the national debt. We make a strong case for the possible future costs associated with waiting to reduce the size of the debt. We can be quite colorful in describing a Greek-like future for the US economy. But liberals say pashaw or dude or something like that. Dude, lots of countries have large national debts and they do just fine. Maybe conservatives in a rush to reduce the US debt should spend more time evaluating the benefits of waiting on the debt? Or are they surely zero? Maybe we conservatives would be more believable if we at least faked an even-handed analysis of the costs and benefits of waiting.

Some might say that letting the liberals and conservatives debate these issues will bring out all the sides of the decision to wait and then voters can decide for themselves. Well, it seems to me that day is over. People have already lined up ideologically. They care little for a real analysis. They just want to be on the side that wins. Is this the kind of democracy we fought so hard to preserve? Does economic analysis become useless in such a world? 

Macro and Football

A devout reader of this blog knows I love macro and JD. But what you don’t know is that I also love football. And by football as an American boy I mean that game with 11 players on each side of the ball and 11 sometimes properly inflated elongated balls. I started playing youth football at a time when helmets lacked face guards and when it was not normal for quarterbacks to have intimate touching with a player called the center. Anyway, I still love football and scream four letter words at my new flat screen TV as players fail to measure up.

So what does all that have to do with macro? It occurred to me that current dismal global macroeconomic performance can be explained by thinking about a football team. It is a pretty simple story. After a long season most players have at least several minor injuries that they endure. That is normal. What is more troublesome for a team, however, is when one of more of the key players --- the so-called stars – have significant injuries that either prevent them from playing or hamper their otherwise fluid and awesome performance. 

In such cases, it is next to impossible for that team to win against a competitive opponent. It is one thing for these players to be individually reduced – but even more importantly – it harms the many relationships among the players. The timing will be off between the hobbled QB and the pass receivers. With an injured running back, a split second slower start means the timing of the blocks may not allow for successful running plays. A hurt linebacker now needs a different kind of support from the safety.

Injuries to key players, therefore, hurt a team in many ways. 

So what is the coach supposed to do? The coach can try to inspire the players. The coach can give them a little energy pill in their Gatorade. The coach can change the playbook and the strategy. Those suggestions seem pretty lame. What the coach really needs to do is to heal the injured players. The only way to get the whole team back to its previous strength and efficiency is to get the key players back to full health. In the meantime other strategies might be somewhat helpful; but they won’t really solve the problem because the problem of team performance is really a problem of issues with one or a few players.

This is the challenge for policymakers around the globe. They pretend that we have macro problems. And therefore we use corrective macro solutions – like austerity or monetary stimulus. But the truth is that the problems in most places around the world since the last global recession derive from a few key sectors and not from anything really macro. It is easy to mistake the source of a problem. When a team fails to score a touchdown it seems like the whole team is the problem. But it is very likely that the failure to score was the result of one or two players' failures. The receiver missed the pass by an inch. The QB was tackled trying to pass because he was a tad slower and his blocking broke down.

The US knows it has failed to adequately address the financial and housing sectors. Europe knows it is sclerotic. Japan cannot hide its protectionist tendencies. China overbuilt its real estate.  Greece knows that the gyros market is in a glut. Venezuela, Russia and other oil-based economies know their oily issues. Today in 2015 we have major sectoral problems that are misinterpreted as macro. So Europe and Japan pour on the money. And then puzzle when it doesn’t solve their problems. We poured enough money into the US economy for it to be growing faster than the proverbial speeding bullet.  Yet we limp along too.

The world needs another coach – or at least a good trainer. The world is never going to experience decent growth again without attending to our sectoral issues in ways that foster healing and real growth. A pain pill won’t help. A band aid will only do so much. Macro policies will exacerbate bubbles. If we want growth and we want to help the middle class--- forget macro and get onto real cause and effect. Sounds crazy from a macro guy but a macro guy ought to be smart enough to know when macro is the problem – and when it isn’t. Now where is my JD? 

Mindless Austerity vs Mindless Irresponsibility

Some of the liberal press who favor the President’s new budget proposal’s spending increases are justifying the latter with a new term they have coined – Mindless Austerity (MA). What creativity! They definitely deserve an A+ in poetry. Apparently evil forces conspired to put us all through a time of MA and finally the President has been bold enough to stand against this harmful, debilitating process.

But I wonder about some things. First, consider the meanings of these words. Austerity is acting or doing without justification or concern for the consequences. It is authoritarian and severe. A synonym for mindless is stupid or idiotic.

What these commentators are saying is that MA that was the product of the same President’s past proposal that passed through Congress was done stupidly, without thought and with no consequences in mind. And these are the same press who supposedly think President Obama is both intelligent and a great leader. MA seems like a strange choice of words to me.

Along with MA is the idea of unnecessary suffering. Clearly the President believes that the middle class has suffered and his latest proposed policies are necessary to improve their lives. A corollary is that government needs to do more to improve their lots and so the additional government spending (and tax revenues) necessary to achieve these goals are absolutely necessary. The idea that economic growth is the only real sustained way to improve jobs and incomes for the middle class is not a major selling point of the President’s new budget proposal. Government to the rescue is. 

Another way to describe the President’s budget proposal is Mindless Irresponsibility or MI. The definition of irresponsibility is not having or showing maturity or good judgment. Adding Mindless to Irresponsible is redundant since the former means stupid. MI is stupidly not showing maturity or good judgment. It seems to me that MI is a better way to describe what the President and Congress did then and are contemplating doing now. Even though they know better they essentially put us in a no-win situation.

Notice what they did to us. First they punished a lot of people when they mindlessly put restraints on programs that might have helped people who needed help. Second, they let other programs grow and in some cases rapidly. Third, despite making some people suffer, the budget did nothing but put us in a worse condition financially.

And that’s what I mean by a no-win situation. The proper financial thing to do is to have a plan whose primary goal is to reduce national indebtedness. The proper economic thing to do is to have programs that support and enhance sustainable economic growth. But notice that while you will see bits and pieces serving those twin goals, the primary emphasis of both parties is to push for more spending and higher taxes.

This is bad for two reasons. Despite hopes and prayers about helping the middle class with “new and improved” government programs that broaden the scope of welfare and reliance on government, few of us really trust these guys to do anything that really works. It is all about them and not about us. Second, we know the President is pushing for higher taxes that are anti-growth.

Governments always promise that big expansions of government deemed necessary in recession will be removed when times get better. A quick check of the calendar shows the recession has been over since January of 2010 – a period of five years. Yet here we are in 2015 arguing about how much bigger spending and taxes have to be. No one seems to be the least bit concerned that the national debt level gets bigger each year and will get a whole bunch bigger when the next recession hits. Think Greece and by that I don’t mean Grecian Yogurt.

Do you see austerity in these tables below? Spending rose from $1.8 trillion in 2000 in $2.7 trillion in 2007 and then to $3.5 trillion in 2014. After rising by $940 billion in the first seven years spending rose by another $775 billion in the next seven. After rising by 53% total spending rose by another 28% in the second period. That is a reduction in rate but let’s face it – a 28% increase in seven years is not austerity by any definition.

Austerity was greatest with net interest. Thanks to the Fed keeping interest rates near zero since 2009, Federal net interest expense has remained stable. Estimates have this one category rising $600 billion in the future when interest rates reach normal levels. After rising by $253 billion between 2000 and 2007, discretionary military spending rose by $48 billion in the next seven years. So you might say that government spending on the military slowed considerably. The rest of the spending categories below showed increases from 2007 to 2014 ranging from $89 to $264 billion dollars. I wonder what the Greeks think of US austerity. 

Spending Levels  in billions
	2000	2007	2014
Discr. Military	295	548	596
Discr. NonMilitary	320	494	583
Social Security	406	581	845
Medicare	216	436	600
Medicaid	118	191	302
Income Security	134	203	311
Healthcare	313	567	831
Net Interest	223	237	229
Total	1,789*	2,729*	3,504*
Changes in Spending Levels in billions
	2000	2007	2014
Discr. Military	na	253	48
Discr. NonMilitary	na	174	89
Social Security	na	175	264
Medicare	na	220	164
Medicaid	na	73	111
Income Security	na	69	108
Healthcare	na	254	264
Net Interes	na	14	-8
Total	na	940	775
Percent Changes in Spending Levels in percents
	2000	2007	2014
Discr. Military	na	86	9
Discr. NonMilitary	na	54	18
Social Security	na	43	45
Medicare	na	102	38
Medicaid	na	62	58
Income Security	na	51	53
Healthcare	na	81	47
Net Interest	na	6	-3
Total	na	53	28

 * Categories do not sum to the totals since some categories are left out. 

Greece: The Tail Wagging the Dog

Human beings do not have tails but we do have animals that do. We are quite used to our pet wagging its tail especially right after we poured a large JD on the rocks and put it on the edge of the cocktail table. We are NOT used to the tail sitting motionless as it wags our dog. That would be weird and perhaps even dangerous.

All of this is relevant because in 2015 Greece has become the tail that wagged the dog.  The stories floating around this week about Greece and the Syriza Party prove it. Syriza is a left-wing radical political party in Greece. I tried to find a generic definition for Syriza but the word appears to mean nothing except for radical left-wing party in Greece. So I will make up my own definition and say it can be defined as a state of emotional chaos and intellectual vacuity.

This Syriza Party is amazing. Not even a majority of Greek voters it has done the impossible. Like David slaying Goliath, Syriza has brought the entire European Union to its knees. Syriza is threatening to not pay what it owes to the EU and has already suggested it might align itself with countries like Russia, China, and Cuba. Amazing. It is one thing for a country to use its veto in the United Nations – but for a European country to align itself with places like Russia and China is beyond imagination. As one of the smallest members of the 29 country EU, Greece is threatening to use it veto power to sway a huge economic union. If this isn’t the tail wagging the dog I don’t know what is.

If that isn’t bad enough for you, let’s say Syrzia is also evidence that a very long historical wave has peaked and is in decline. It’s like when your best friend and companion Bogie can no longer catch Frisbees in mid-air and instead retrieves the missile from the ground and limps back with catch in mouth and tail weakly wagging. You know the best is over. You fear for what is to come. You feel terrible and sad.

I am not exaggerating when I say that Greece shows that we have hit a sad turning point. The people of Greece spoke. They are tired of unfair austerity and want to move on with a new government that will restructure their debts. It seems unfair to Greek voters that they would have to pay their debts. Keep in mind that the Greeks entered into this mountain of debt willingly. Greeks were not deceived by Payday Lenders or by loan sharks in shiny suits.

Even before the crisis hit in 2007, Greece’s government deficit had reached around 10% of GDP. At that time the overall Euro area had a deficit of about 2.4%. During the crisis things got worse for all governments but in Greece the problem was catastrophic with debt to GDP reaching 19.1%.

No one made Greece join the EU. And no whips were involved when they gave up the drachma in favor of the euro. In joining this club they knowingly and willingly signed up to hundreds of agreements. Among them they agreed to keep their deficits no higher than 3% of GDP and debts no greater than 60% of GDP. The Greeks have done neither. One of the reasons for joining was to give Greece a more solid economic reputation. Being a successful member of the Eurozone gave them instant credibility and better interest rates for borrowing. But despite continued and repeated efforts to ask Greece to own up to its obligations, the Greeks made excuse after excuse and now find themselves in an impossible mess.

Austerity is too hard. Paying off honest debt is unfair. Restructuring the economy so it can compete and changing the government so taxes are normal and bribes are illegal is too much. Now the media says that other countries are watching the Greek case and will follow if they are successful in getting a huge portion of their debts written off. That anyone in the Eurozone would even listen to this nonsense is beyond credibility. 

When the Greeks threaten to not change and to not pay their debts, someone is harmed. Some of the money is owed to individual countries. If the Greeks don’t pay their taxes will have to increase in those countries. The Greeks also owe the EU government, the ECB, and the IMF. When Greece does not pay a loan,  other countries have to pay it. But the critics argue that it is still unfair. The IMF is rich. The EU is not popular among many Europeans who call themselves Eurosceptics. The ECB can print money.

But all this is nonsense.  The Greeks have to change. They have horrible habits that will devastate them in a global economy whether they are inside or outside of the EU. Sure they can get out of the EU and Eurozone. But they are still a member of the world economy. You can kick a drunk out of your club but he or she is still part of your community or town. The Greeks have to change their ways and this crisis just proves it. Okay so austerity is rough. But this is not just about austerity. It is about common-sense reforms that many European countries have already taken to make their economies more efficient and competitive.

So why don’t more people see it this way? I think it is because we have gone too far. Too many people hate markets. Too many people raise so called fairness above competitiveness. Too many people don’t see simple universal truths and instead see complex and complicated layers of excuses. We don’t care if Greece does the right thing. Our hearts ache for Greeks who will have to change their ways. Our hearts similarly pound when someone suggests we get tough on Russia in Ukraine or Bashar in Syria. 

Russia has invaded the Ukraine. Period. Bashar used gas on his own people. Period. Greece is a mess. Period. Doing the right thing will be painful. So we excuse inaction by talking about time, and layers, and complications.  This is not a one-time change in attitude. It will be hard to undo. Democracy makes it too easy for the heart to rule the head – or for the tail to wag the dog.