Covid War

It was recently announced that the US government deficit for fiscal year 2020 was $3.1 trillion, or 16.1% of the nation’s output for that year. In the previous year, it was a more normal, but still large, 3.1% of GDP. It averaged about 4% of GDP over the past 10 years. That’s quite a hop to 16.1% in 2020. The government deficit is defined as government spending minus government revenues. The main reason the deficit went up so much in FY 2020 was the 47% increase in government spending. You heard that right. The Federal government decided to spend almost 50% more in 2020 than in 2019.

Each annual deficit must be funded – so this means we added $3.1 trillion to our national debt. Our national debt is now more than 100% of the size of the whole economy. The figure for FY 2020 is 102%. We have not had such a large debt in the last 75 years. Around 60% might be considered normal.

One could say that Covid 19 is as serious as a world war. If we could have large deficits and debts in the 1940s, then it should be okay to have large deficits and debts in 2020. While I have argued in this blog that we might have spent less to save us from Covid 19, I won’t belabor that point here. My point today is about what happens next. Our political parties are arguing now about whether or not to add either another trillion (or so) or another three trillion (or so) to the debt.

Once our government saves us from Covid and recession, what will happen next? I decided to go back 75 years and ask what it was like in the US when the world war was over and how we addressed our huge debt of that time period. Maybe we can learn from history?

Below is a table I put together using data from several US government sources (Congressional Budget Office and the Bureau of Economic Analysis). The data start in September 1940 and go through 1955. World War II went from September of 1939 through September 1945. The Korean War kicks up then and goes to around 1953, but that war is not the topic for today.

The data in the table going from left to right are: Federal government expenditures as a percent of GDP, Federal defense spending as a percent of GDP, Federal government revenues as a percent of GDP, Federal government deficits as a percent of GDP, National debt as a percent of GDP, and the annual percentage change in real GDP.

What do we see?

            Defense spending went up dramatically in two years – in 1941 it was 418% of GDP and in 1942 it was 256%. We definitely went to war!

            Total government expenditures also increased rapidly and were growing at 40% per year by 1943, 1944, and 1945.

            While tax revenues also went up in those years – they did not go up as much, so we see huge increases in government deficits from 1943 to 1945 and similar increases in national debt in those years. The debt as a percent of GDP rose from 52% in 1940 to 119% in 1946.

            The table shows that it took until 1955 for debt as a share of GDP to return to 67% of GDP. It took at least 10 years to go back to pre-war levels. Focusing on the deficits column you see there were mostly annual surpluses after 1956, some near-balances, and only two years of small deficits.

            Upshot: To get back to something like “normal” debt, it took a decade of surpluses or budget balances.

            We also see in the chart how real GDP reacts when governments increase debt – during the war we had high double-digit increases in national output. That economic strength did not last, however, as you see pretty much 5 years of negative or near negative growth starting in 1945.

That’s lots of information to process, but what I see is that it takes time to reverse extreme cases of government deficits and debts. I also see that reversing them causes recessions. I also see that it took a long period of austerity in budgets to bring us back to normalcy.

My question to you: Will the aftermath of the war on Covid 19 be like the aftermath of WWII? Will our politicians, after fighting the war fiscally, move to several years of annual government surpluses? Will they do the hard things necessary to restore the economy? If they don’t, what will our economic growth be after, say, 2022?

The Stock Market

The stock market is getting a bad rap these days. As I wrote last week, the recent relative success of the stock market is used as evidence of a growing rift between the fortunes of rich people and poor people. This rift gives people more confidence that they should do something with stocks to rectify the problem. Some politicians want to take stocks or the income from stocks away from the rich and distribute them to the poor. Or better said, they want to tax them to death and redistribute the proceeds through government.

Last week I pointed out that stocks are not owned just by rich people. Many of us less than rich persons own stocks and thus a lot of stockholders would be impacted by whatever is done to make stocks less valuable. I won’t repeat that information.

There is more to say about stocks. Stocks are created by companies. They are pieces of paper. They are pieces of paper that take on value because they promise the owner of that piece of paper a dividend. What does it take to get a dividend from a stock? Unlike an interest payment that is legally promised on a bond, a stock dividend is as gotcha. The promise is that if the company has a good year – it will pay dividends. If it does not have a good year, then it might pay a small dividend or maybe even nothing at all.  

Thus, buying and holding a stock is a risky thing. We hope that the company will do well so that we get a nice juicy dividend. Another aspect of a stock is that it has a price. The price is set each day for stocks through the interaction of supply and demand. If word gets out that a firm is doing poorly, then the market price of its stock might fall.

Ugh. If the firm is doing poorly you might not get a dividend AND if you want to sell the stock, you might have to accept a lower market price and thus take a loss on it. Clearly, stocks are risky businesses. Why do so many people and retirement funds want to buy stocks if they are so risky? Answer – they are optimistic that firms will do well – stock prices and dividends will rise and the owners of the stocks will get richer. No matter your income from work, if the stock market rises, you get richer. It’s a gamble – because you don’t know if firms will do better or worse in the coming weeks and months.

But still, stocks are risky. Right, and that’s why a lot of people are very careful in how they use their saving. Aha – the world “saving” just snuck in. Most of us save.

Okay, not all of us save. I have some friends with high incomes and they manage to always spend more than they earn. They have negative saving – or what we refer to as borrowing and debt. And then there are a lot of people who cannot save because they don’t earn enough to even provide for a meager standard of living.

But national saving is a big number. Some of it just ends up in our checking accounts at the end of the month – or maybe our saving accounts. Or maybe we buy a certificate of deposit. Or maybe we buy a government bond … or a corporate bond. Or maybe we buy paintings. There are lots of ways to save. Stocks are just one of the ways.

It makes sense that people, rich or not, want to save and use some of that money for stocks. But why do firms want to sell them? Mostly because they need the money. The main idea is that a company might not generate enough revenue to pay more than wages, rent, intermediate goods, and so on. If they are going to be more successful in the future, they may want new equipment, a larger office building, better cars for the salesforce, etc. They can get that investment capital from a bank, they can borrow it by selling bonds, or they can ask you to be an owner of their stock. Whichever they do, the end result is that firms look ahead and try to be more productive.

So what? We want to save as a nation, and we want to buy stocks. Firms need money, so they sell stocks.

Simple. There is a reason for the stock market, and there is a reason we want it to be healthy with lots of transactions and with rising prices and values. People want good options for their savings and firms want to find lots of money to use for growth. 

The stock market is not the reason there are poor people. Killing the stock market will not stop or reduce poverty. Having a viable stock market means we funnel good savings into companies who can use it to grow, be stronger, and hire more people along the way. That might not end poverty but surely it won’t help if attacks on the stock market hinder firms attempts to grow and thrive. There are other and better ways to reduce poverty.  But those ways are neither quick nor easy -- maybe that's why some politicians would rather speak loudly and unkindly about the stock market. 

 

K

A topic of conversation these days is the impact of Covid 19 on distribution of income. Numerous articles point out that the stock market is healthy and benefiting rich people, while lower income people’s jobs and wages are bearing the economic brunt of Covid.

We now have a letter to illustrate these impacts, the K. It suggests that the upper part of the K has fortunes rising for rich people; the lower part shows incomes falling for everyone else.

As in many things that have to do with poverty and distribution of income, I cannot take exception with the facts. Surely those at the lower end of the income distribution are subject to disproportionately negative impacts when the economy tanks. Last-in-first-out is an inventory term but applies well to employment and jobs. Often those most recently hired in an expansion phase are the first to go when things turn down. Those hired near the ends of expansions are generally people who were not the first choices of companies.

Even though we agree largely on the facts, the issue is always what to do about them. Here is where it gets really messy. What do we do in this country to reduce the impact of economic downturns on our population? Surely people will be injured by recessions. How do we share those burdens better?

Answering that question is messy because it involves both politics and economics.

We have a progressive tax system that was supposed to be part of the answer. If you make more money this year, you might be bumped up to a higher tax bracket. The richer you get, the more money the country takes in to distribute.

That seems straightforward except for the fact that the tax code is wacky. As we have read lately, rich people in America sometimes seem to pay no taxes at all. If we like a progressive tax system, then why let them get off the hook? Write-offs like those that let you deduct charitable donations are designed to satisfy other goals. Let’s not list all those write-offs here. Argue about this one or that one – but let’s be clear that a lot of them exist and they often do a lot of good. A rich person who chooses to take advantage of these write-offs can reduce how much she owes in taxes. 

To have more money for lower income families, perhaps we should get rid of these write-offs. That becomes a very economic and political decision. What if preventing a write-off lowers how much money people contribute to not-for-profit institutions? Who gets hurt? That’s economics. But there is also the political dimension. How do we pass legislation to get rid of write-offs? Which ones do we end?

Write-offs are one of many challenges. What about the stock market? Those writing about inequalities point out that rich people have done well lately as evidenced by the stock market. Surely the stock market has bounced back, but like many other economic dimensions of the economy since last January, it has also taken a hit.

But what about the stock market? Is it really owned by Richie Rich and no one else? I don’t think so. One economic reality is that you are not going to own stocks if (1) you don’t save and (2) you don’t work for an institution that puts money into stocks for you. More than half of the population in the USA own stocks. Many of them are very rich. But many have great pensions earned by working for the government and private companies. Still it's only about 50% of the population.

It is not surprising that poor people – who don’t work for companies with good pensions and who often earn so little that they have very little to save – don’t own many stocks or other financial and real assets.

That is a main source of inequality – the stock market’s performance favors those who own stocks. What do you do about it? To answer that question, we are back to economics and politics again. How do we help those at the lower end of the income distribution have permanently higher incomes? How do we help them to earn more and save more without throwing the baby out with the bathwater? Or in political terms, how do we get government to agree on effective ways to accomplish this?

To those who point a boney finger of blame at one party or at rich people, I challenge you to do less pointing and more hard thinking about how we effectively help those with lower incomes earn and save more. Wouldn't it be nice if our programs attacked the real causes of poverty and moved people permanently to higher levels of income and wealth? Or is it sufficient to transfer money to them so that they can continue to live on the edge of poverty. While some people may never be able to live through their own efforts, I am guessing that the situation of most poor people can be improved by helping them overcome obstacles. That sounds better to me than helping them stay poor forever. 

Bizzaro World

Bizzaro World was a fictitious planet found in comic books which featured situations that were unexpected or opposite to what would be expected. It seems to me as I try to write this blog that I am having an increasingly difficult time fitting into our current Bizzaro World.

Maybe this is what always happens. People live and they get old. They find that the world around them has changed. They no longer understand how the world works. They are ready to spend the rest of their lives grazing on the lower 40.

I’ve never had trouble finding a good topic to write about. I have written over 500 posts for this blog in the last 10 years. But I have to say that I am wondering how I fit into this bizarre world we now live in.

Last week I wrote about the Fed. How bizarre is that? After a century of trying to keep inflation low, the Fed now says they want to make inflation high. Zero interest rates for three or more years? What does that even mean?

I often write about economic growth. But no one seems to care much about that topic. Economic growth depends on the growth of productive inputs like the growth of the labor force and its productivity. Have either candidate for president said a word about those topics?

And then there are the usual ups and downs of the business cycle. Macro looks at the key components of spending to discuss these cycles and how to end recessions and start expansions. But apparently, the sizes of the recent changes in spending from one quarter to the next are so huge that they almost lose meaning. What does it mean when consumer spending falls by 30% one quarter and then rises by 50% in the next one? Bizarre.

And isn’t it crazy that we don’t seem to care how large the money supply and the national debt are? We even have a new theory called MMT which says debt is irrelevant. Seriously? When is the last time your friendly banker told you not to worry about your debt?

And what about letting markets work? Isn’t it interesting that in what appears to be one of the biggest recessions in decades, firms raise prices in the face of declining markets?

And what about supply and demand? Supply left through the back door. Better said, everything now seems to depend on the resurrection of demand for goods and services. And we need a little Viagra to get demand up and going again. The government wants to give people more money so they can spend more. Presumably, that will cause firms to hire more workers and produce more goods and services. But how can we spend more when stores aren’t really fully open or they can accommodate only a small group of buyers. Many of those stores will never open again.

Our government says our challenge is raising demand and they are spending trillions to get us to buy more. But the real constraint is Covid and that restricts output. The government is pissing away our money, putting a cast on your right arm when your left arm is broken. Bizarre.

I’m sure that a lot of this has to do with special problems associated with Covid but I am guessing that there is more to it. Maybe it’s getting to be time for me to head out to pasture. I could start writing about duck cloacas but then my editors might wonder about that choice. Of course our government does function a bit like a cloaca so you better get your dictionary out. 

Jim Dandy to the Rescue

 In 1969 a music group named Black Oak Arkansas played the song, Jim Dandy to the Rescue. 

One verse went like this:

One day, I met a girl named Sue.
She was feeling kind of blue.
I'm Dandy, the kind of guy
Who can't stand to see a little girl cry.
Jim Dandy to the rescue!
Go, Jim Dandy! Go, Jim Dandy!

Apparently Jerome Powell and his buddies at the Fed took that song to heart. Powell said recently  in a Wall Street Journal article, more than two million Americans have permanently lost their jobs and 11 million fewer Americans were employed last month than in February. Mr. Powell said it would be important for Congress to spend more money to support these households, along with hard-hit businesses and state and local governments, to limit additional damage to the economy.https://www.wsj.com/articles/fed-signals-interest-rates-to-stay-near-zero-through-2023-11600279214

Powell previously had stated that the Fed would keep interest rates near zero for at least three years. But that’s not enough. He says he wants Congress to do even more.

While I love the song Jim Dandy, it made me realize how far we have come with respect to macroeconomic policy since I was in school.

Let's start with microeconomics. Draw a supply and demand curve for anything – let’s say masks. Note the intersection of the curves tells you the equilibrium value of output and prices of masks. Cool.

Now let's suppose people listen to Donald Trump or their barber and they decide to stop buying masks. The demand curve for masks shifts downward. What does the model say happens next? When I was teaching that sort of thing, I broke it down.

1.     With prices unchanged, supply would now be greater than demand.

2.     We call that situation a glut or an excess supply.

3.     Masks are sitting around gathering dust in storerooms.

4. Firms will cut back on mask production and employment.

5.    Firms would rather sell those masks than have them sit in a warehouse.

6.     Firms, faced with this new situation, lower the price of masks.

6.     Lower prices for masks raises demand for masks and they sell more masks at the new lower price.

Cool, eh. This is what people call market economics because competition in markets means there is a more or less automatic mechanism in a market economy. If demand and output decline, you don’t need Jim Dandy to come to the rescue. If demand and output decline, prices fall and as they do, this restores some of the lost demand. Presto. Problem resolved.

Some of you might be skeptical but this is what we believed for a long time. Somehow now, we never even speak of markets working. If there is a problem in a market – we need to bring Jerome Powell or Nancy Pelosi together to save the day.

You scoff. Larry, you are into the JD again.

So I went to the Bureau of Labor Statistics to look at price data. They have a lot of price data and I won’t bore you with all that. I will tell you that in the very extreme and dire situation in the US after 1929, we had a really big economic contraction called the Great Depression. Guess what happened to prices? Prices, as measured by the annual percentage change in the Consumer Price Index, fell during four straight years

            1930  -2.3%, 1931 -9.0%, 1932 -9.9%, 1933 -5.1%.

Did that solve the problem of the Great Depression? No. Did fiscal policy solve it back then? No.  

But a trip to the Bureau of Economic Analysis  (https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey ) shows real GDP growing at very high rates from 1934 to 1944 (except for 1938 when it declined by 3.3%). In those 11 years the annual increases in real GDP ranged from 18.9% in 1942 to 5.1% in 1937.

So maybe prices did fall to clear the markets?

This is not a sophisticated historical or statistical exercise. But I can tell you that after a major collapse in the economy, prices did fall, and that was followed by a vigorous economic expansion.

A subsequent shift in policy advocacy towards Jim Dandyism means that markets don’t clear anymore. Why would a firm accept a lower price if it knows the government is going to come to the rescue? When Powell tells all of us, powerfully, that he wants inflation to be higher, it seems to me markets will never function properly. 

Look at the data again. Between 1949 and 2019 there were only three years in which the price level fell. Those three years were quite interspersed – 1949, 1955, and 2009. In every other year between 1949 and 2019, prices rose. Since 2017, the price index has increased by about 2% per year. Prices did not generally fall in recessions. 

If Powell would quit singing Jim Dandy and stop cheerleading for higher prices, and instead lecture firms about their social and economic responsibility during a recession, maybe then we might get a recovery -- a recovery that does not involve huge mountains of money sitting in banks and an enormous increase in national debt. Maybe worth trying?

Life in 2020

Last week I messed around with the glass half-full versus half-empty. It’s a decent message. Yes, things are bad but if you look around, things could always get worse. Admittedly, that philosophy can only go so far. When things get bad, you feel pretty crappy.

Today what’s affecting me is the idea of living with change. Life has changed a bunch since January. Most of us are not crazy about change. We like to know that the grocery store will have plenty of our favorite items in stock. How could they possibly be out of raisin bran?

I’m sitting in my apartment in Seattle and looking out the window. Today (I wrote the first draft of this piece on September 16) I can see the sun – at least a little. It is 11 am but the haze from the smoke from all the fires is so thick that the sun is barely visible behind a very grey cloud. Smoke hangs on everything. So what? Apparently gulping down smoke is even worse than gulping down too much Jack. Who ever would have thought of that?

That means that since I am old and frail and my respiratory system looks like a 1920s railroad yard, I am not supposed to go outside. It is okay for young people to suck in soot but us older gentlemen (and ladies) are supposed to stay inside. That makes it kinda hard for me to go on my daily walk with friend Barbara around Green Lake.

Wear a mask. Well maybe. “They” say masks don’t work against smoke. Who the hell are “they”? That’s the other thing. Whether it is smoke or Covid, there are a lot of experts out there who seem to want to shout their opinions everywhere they go. A walk down the street is a national debate.

One can’t smell a rose or down an Old Fashioned without having to listen to someone spout off about any one of dozens of topics. We are in debate mode. And these are not friendly debates. For most people, "its my way or the highway". That’s different and takes some getting used to. 

I go to the gym now. I can’t go on walks, so I am left with indoor activity. I know that sounds risky but my gym seems very safe. Gym used to be partly a social event. I met ladies and gentlemen there. Now we all wear masks and we try to stay 10 feet from each other. We actually have to work out at the gym! It's very tiring to work out for a whole hour without stopping to discuss recipes and restaurants. 

Can you imagine doing exercise with a mask on? Now that’s a change worth wondering about. We all look like we are about to hold up a 7-11. We blow spit into our masks as we try to do a few curls and a push-up or two. Before the smoke storms, we could walk outside without a mask. Now you wear your mask everywhere. Inside. Outside. I wear mine to bed. Just kidding about that one. 

Tell that to someone last January and they would have taken your driving privileges away. And how do you know how pretty a lady is while she does bench presses if she has a mask covering her face?

Working out now involves not only a mask but a cloth and a bottle of some stuff you spray on the machines to kill all those covids. Everyone is watching everyone else. Did Joe wipe down his machine sufficiently?  Did he wipe it down at all? Is he wearing his mask properly? Does it cover his nose and mouth?  Is he a Trump supporter? I am a highly active wiper-downer. I feel a little sorry for the machines. Surely they won’t last very long with all this spraying and wiping. My mask is firmly in place. I check it every seven seconds. 

Changes, yes. But where does all this end? We have smoke and covid and race relations. What’s next? Murder Hornets?

The Fed's New Approach to Monetary Policy

The press went wild and crazy recently when the Fed announced a new and radical policy change. Sometimes I just don’t understand these people. The story has two parts. 

First,  the Fed is now very concerned that inflation is not high enough. They most definitely want it to reach 2%. Second, they say they are going to tolerate inflation going above 2%.

It makes me think of a powerful and omniscient Fed that can wield its many policy tools so as to manage this lazy inflation kid.

So I digitally went to my friend, Fred, the data analysis tool at the St. Louis Fed. There I was able to download enough inflation data to gag a goose at Green Lake. https://fred.stlouisfed.org/series/CPIAUCSL#

I graphed (not here) what is called the Consumer Price Index (CPI) from before the Tuna was born to now.

This was data for every month from February 1947 to July of 2020.

I was able to get a transformation – the annualized percentage change from one month to the next. That’s good for comparison purposes.

I looked at the graph and it made my stomach sick. So many ups and downs!

So I downloaded the data into an Excel file and looked at the numbers.

What did I find? I found a pattern in the inflation rates that resembled Peter Wachtel after his usual two-bottle liquid dinner in Marietta.

Main conclusion? If the Fed was trying to predict or control Peter, then they are going to have their hands full.

For example, in the 12 months between August 2019 and July 2020:

            The CPI rose in 9 months, but declined in 3 months.

            The biggest one-month decline was April 2020 when it fell by 9%.

            The biggest one-month increase was the 7.3% increase in August of 2020.

            The average monthly rate over those 12 months was 1.1%

I’m not sure what the Fed would say about all that monthly variability, but it might say, “See Larry, inflation averaged only 1.1%.” We must mount our hefty steed and push it faster. Clearly if the goal is 2% and it increased by only 1.1%, then Mr Powell would be in a dither. Imagine that you were hoping to make $2 at a craps table and you only got $1.10. What a gigantic humiliation.

But that’s not the whole story. This little table shows you some of the other years.

            2020  1.1%

            2019  1.8%

            2018  2.9%

            2017  1.8%

            2016  0.9%

Are they keeping 2018 a secret? Were they excited and happy in 2018 when they got inflation (2.9%) well above their 2% goal?

What if you averaged the last three years and found that for the last three years inflation averaged about 1.9% per year? 

1.9% seems pretty close to 2% to me. I guess that’s irrelevant. Maybe they think they have such precise controls over the economy that they can spin the money dial and get 2% instead of 1.9%?

Despite inflation of 1.9% over the last three years the Fed had to make a major announcement that inflation is tool low and that they needed to make a major historical change in their targeting.

And the press lapped it up like a huge chocolate milk shake in September.

Please tell me what is wrong with these people?

Okay, I will take a shot at that question.

What is wrong is that they aren’t honest with us. They think we are stupid and they think we will believe the Fed and the press and we will give them kudos and honorary awards for wonderfully controlling our economy. No kid goes away without a medal to pin on his or her chest. 

The truth is that the Fed doesn’t care a wit about inflation. Inflation is a way to take our eye off the ball. The ball is the goal to always be pressing on the accelerator pedal. The Fed’s goal is to always be trying to get demand in the economy to grow faster. Their goal is for that increased demand to reduce the unemployment rate.

Why can’t they just admit that? Why can’t they say they have only one policy target? Since I have been so brilliant today, I will let you reply and tell me why you think the Fed would rather distract us with meaningless inflation data than just tell us what they are really trying to do when they keep interest rates at roughly zero for infinity.  

Glass: Half Empty or Half Full?

 Covid 19 is on our minds continually. We dodge people and we wear masks and we find it hard to be positive about the future. I often have nightmares about the physical process of the medical treatments and of course the prospects of death at my young age. Nothing can change the reality or the facts – though we do argue about the facts.

That’s were philosophy comes in. It’s the old glass half-full or half-empty story. There’s the glass – which way is it? We are challenged to decide how we are going to live with this threat.

So I decided to follow an approach that focuses on what others have dealt with. If they could get through those histories, then I suppose we can deal with our own.

Please don’t fault me for the choices I made below. They are meant to be illustrative. But they are also real and meant to remind us that others have had to find ways to cope with some pretty horrible things. They somehow had to find ways to live despite incredible uncertainty. Maybe our situation isn’t as different a we think?

I encourage you to write me or make comments about things I have left out.  

I cut and pasted this information below mostly from Wikipedia. I am not a historian and cannot vouch for any of the numbers. While not each and every item listed below had the same significance and incidence, each is an example of something that affected many directly and many more indirectly. Living through these events without knowing how they would turn out must have been terifying.

• The Blitz was a German bombing campaign against the United Kingdom in 1940 and 1941,... From 7 September 1940, London was bombed by the Luftwaffe for 56 of the following 57 days and nights.
• From 1933 to 1945, Nazi Germany operated more than a thousand concentration camps on its own territory and in parts of German-occupied Europe. The first camps were established in March 1933 immediately after Adolf Hitler became Chancellor of Germany.
• By 1995, complications from AIDS was the leading cause of death for adults 25 to 44 years old. About 50,000 Americans died of AIDS-related causes. African-Americans made up 49 percent of AIDS-related deaths.
• The Black Death (also known as the Pestilence, the Great Mortality, or the Plague) was the deadliest pandemic recorded in human history. The Black Death resulted in the deaths of up to 75–200 million people in Eurasia and North Africa, peaking in Europe from 1347 to 1351.
• By far the most costly war in terms of human life was World War II (1939–45), in which the total number of fatalities, including battle deaths and civilians of all countries, is estimated to have been 56.4 million, assuming 26.6 million Soviet fatalities and 7.8 million Chinese civilians were killed.
• For 110 years, the numbers stood as gospel: 618,222 men died in the Civil War, 360,222 from the North and 258,000 from the South — by far the greatest toll of any war in American history.
• In 1995 Vietnam released its official estimate of the number of people killed during the Vietnam War: as many as 2,000,000 civilians on both sides and some 1,100,000 North Vietnamese and Viet Cong fighters. The U.S. military has estimated that between 200,000 and 250,000 South Vietnamese soldiers died. The Vietnam Veterans Memorial in Washington, D.C., lists more than 58,300 names of members of the U.S. armed forces who were killed or went missing in action. Among other countries that fought for South Vietnam, South Korea had more than 4,000 dead, Thailand about 350, Australia more than 500, and New Zealand some three dozen.
• There were so many things going on around 1918 that it’s difficult to say which one was the most horrifying. What’s not mentioned in the same tone, however, is the Spanish Flu, even if it was by far the most devastating event among everything happening around the time – at least in terms of death count. At its peak, it infected around one-third of the entire human population, and total casualties are somewhere in the ballpark of 20 million to 50 million.
• I doubt the accuracy of this data I found, but it quotes numbers of slaves in the US. In 1790 there were estimated to be 694,000 slaves in America. In 1860 the number had risen to about 4 million. Slavery was not legally abolished until the 13^th amendment in 1865, December 6^th ratified. Racism remains an obstacle to the lives of millions in America and elsewhere.

I end on that point.

Da Market in 2020

The stock market indices closed at record amounts today, September 2. 

There is a lot of wondering whether or not the markets are overvalued. I am not qualified to answer that question, but I can provide a little data. 

I stick to the S&P 500 for the data. I got the data from the Wall Street Journal today. 

Date                                            S&P

September 2, 2019                      2976

February 20, 2020                       3373

September 2, 2020                      3580

My Casio calculator finds this:

                                                                   

   September 2 to February 20 --   13.3%      31.9%*

   February 20 to September 2 --     6.1%      10.5%*

   September 2 to September 2 --  20.3%       20.3%

* annualized rate of change

Interpretation:

    Measuring the five month change from September 2019 to the peak in February of 2020 -- the S&P rose by 13.3% or an annualized rate of about 32%.

    The market crashed for a while. 

    Measuring from the previous peak in February 2019 to the most recent peak on September 2, 2020 -- the S&P rose by 6.1% or 10.5% on an annualized rate.

    From September 2, 2019 to September 2, 2020, the S&P rose by 20.3%.

Point?

The very high values of the S&P did not come mostly from the recent advances in the market. The market had already risen before the recent crash and that explains most of the increase over the last year.

Yes, the market crashed. And measured against the very low value it attained of 2237 on March 23, 2020  -- the S&P gained 60% as of today, February 2, 2020. 

But that 60% can be misleading. The market gained only about 6.1% (10.5% annualized) from peak (Feb 2020) to peak (Sept 2020). 

Is the S&P overvalued? Not sure. If it is, it is not so much from what happened after the crash -- and much more the result of gains before it.

For comparison sake the S&P has increased by about 7% per year in the 21st century. 

If the factors propelling the S&P 500 from before the crash have dissipated, then it is possible that recent stock market behavior is not particularly strong and might not  warrant any worry over peaking. 

That's a big if but worth considering before you sell it all. 

Policy Stew

Add some chocolate ice cream to a hearty beef stew. How about a slice of Key Lime pie in your lamb stew? Add some fresh watermelon to your spicy chili.

Mix JD with some Scotch.

Sound terrible?

Add a soccer player to your NBA team? A sumo wrestler to your swim team relay?

Enough?

Garlic is very different from a lamb shank. But grill them together in a pan and you have made something delicious.

Some things go together. Some things are best kept separate.

That’s the way I feel about monetary policy and policies to improve income distribution. These are both important and delicious in their own rights. But they are not like ingredients of a stew – you cannot just mix them together and hope for anything good.

As I hear some of our politicians today – they don’t want to keep the watermelon separate from the chili. Monetary policy is held hostage or must support a variety of issues – poverty, race, education, housing, college education, global warming, etc.

What do I mean? I have been arguing that the Fed has poured too much money into banks. I want the Fed to judiciously remove that money. People worry that such a policy is unfair because it disproportionately hurts the poor and minorities. I don’t know if that is true, but so long as we think it is true it means that monetary policy won’t be used for its intended purposes. If we use monetary policy judiciously, we use it to stabilize the economy. That should be good for the poor.

Monetary policy is a simple thing. The Quantity Theory of Money (MV=PT) is the basis for thinking about money. If monetary velocity (V) is constant, an increase in the amount of money in circulation (M) will impact either the price level (P) or the amount of transactions (T) or both. With V unchanged, an increase in M will lead to an increase in P and or T. Why? What's the thinking behind this simple equation?

It has to do with the demand for goods and services. An increase in money causes demand for goods and services to increase. Firms will accommodate that rise in demand with a rise in output and/or a rise in prices.

That’s it. That’s the whole story. If you have a shovel, you can move dirt. Your shovel will not turn on the electricity and it will not pour you an Old Fashioned. If you increase the money supply, it will affect output and prices. It will not solve international trade problems and it will not solve poverty. It will not make our incomes more equal.  MV=PT. That’s it.

If we have unequal incomes in America, don’t fool around with monetary policy. If we have distribution of income problems, then use policy tools that directly address what you think causes unequal and unfair incomes. Stay focused. Don’t throw out the baby with the dirty bath water.

One final point. Some say that monetary policy has driven up the stock market and that has benefited mostly rich people. But clearly the same people who say that also want monetary policy to spur the economy into creating more jobs and incomes. There is no conflict.

If along with a strong stock market, we find distribution of income issues worsen, how does one rectify the imbalance in a useful and effective way? I doubt the solution is very simple, but I’d prefer discussing those approaches rather than folks wanting to hamstring the Fed by asking it to solve things it has no real influence on.

Money: Recession or Recession?

Last week I wrote about a mountain of money and showed concern that if it is not removed it will eventually cause a problem for the US economy.

Many of you are not convinced. You believe that the Fed should be stimulating the economy after a quarter when the real GDP crashed by 33%. Many of you do not see any signs that all that money is causing problems.

But I am going to be stubborn. The case for keeping that huge chunk of money is not very good, and the fact that no problems have popped up yet doesn’t mean we can ignore some very real risks.

The recession and the rise in unemployment were not the result of people wanting to spend less. Rather, the lack of spending is mostly because COVID-19 regulations shut down many of our purchasing options. Yes, we are opening the economy but so far that is an experiment. As COVID-19 comes back, along with us getting out and spending more, we will have more limits on our spending behavior.

Point? Fed monetary policy is not doing very much. What matters is the course of COVID-19 and the shutdowns that go with that. We don’t need to pile up all that money. What we need to do is tame COVID-19.

The bigger issue is the risks arising from a successful attack on COVID-19. That medical breakthrough is what will get us spending again. With banks flush with money and with us ready to spend our brains out, now we have some problems. Why? Wouldn’t that be good for output, profits, and employment? It sure would. But look back at history. When demand comes roaring back, but supply cannot possibly keep up the pace, it leads to shortages -- and those shortages have consequences.

Think basic economics? When demand rises and supply doesn’t match it, it causes inflation. Real and marked progress against COVID-19 will bring rapidly rising prices, wages, cost of materials, rents, and more. Many companies have gone out of business with little chance of snapping back. Supply chains are in total disarray. Workers may have found alternative uses for their skills and time. Firms will not find it easy to find, hire, and train people. Banks have all that money sitting around and they will want to induce us to borrow it and spend it. And we will want to – demand is not the problem. The risk is that demand soars and supply inches up. The difference results in inflation.

What can the Fed do in such a case? One approach is to ignore the inflation. Think of inflation as a negative but natural side-effect. The good thing is that the Fed would be letting supply restore itself and economic growth would be appreciated. The bad thing is that inflation will rise. It might be worth the risk, but history suggests that once the Fed mounts that pony, it is not easy to get off. We learned that rising inflation often turns into runaway inflation and that causes recessions.

There is ample risk from too much money, but the Fed won’t try to suck it out of the system for fear that interest rates will rise and cap off the national recovery. It sounds like a terrible choice – leave the money in and get inflation and recession, or take the money out and get recession.

My vote is to take the money out. Take it out gradually. After all, it's just sitting around in vaults. We are not using all that money. I doubt that a discernible move in that direction will create much harm at all. If and when the economy recovers there will be plenty of money around to facilitate a supply response. 

Hi honey, why are you playing with that gun? Mom, don't worry, I won't shoot it in the house. Okay sweetie, just be real careful. I will, don't worry Mom. 

 

Is the Fed a Drug Dealer?

The stock market seems to like the Fed’s promise to continue stimulating the economy. There are forecasts that the economy will weaken in the near future – and the Fed believes it needs to keep interest rates at zero to keep the economy afloat.

I win no popularity awards for being a curmudgeon, but I can’t help but point out the damage the Fed is doing.

The best analogy I have seen lately has to do with drugs or pain medicines. The drug analogy helps us to understand the predicament.

Surely pain medicine has its place. We need pain medicine to get us through bouts of intense pain. This pain might come as a direct result of an injury or it might be the expected result of a successful surgery. Whatever its purpose, the medicine is meant to be highly effective and temporary. The bruise or the surgery’s incisions will heal.

The problem comes when the pain goes away but the patient gets addicted to the drug. It might be a mental or a physical addiction but that does not matter. It is real. One needs to keep taking the drug. At some point the addiction will become damaging and something must be done. At some point the drug will have to be withdrawn. This process will be incredibly painful. The wise doctor will help one with the withdrawal, but much depends on the behavior of the patient. Some would rather experience the addiction than the withdrawal.

Larry, you are not a medical doctor. What’s up?

What’s up is that the Fed has just told its patient that it will continue the stimulus. As it injects more and more money into the economy creating imbalances everywhere (I hope you weren’t planning to live your retirement on your interest income), it says nothing about when or if it is going to reverse operations -- and withdraw the money.

But the Fed doesn’t know how to do that. It has zero experience with withdrawing mountains of money. Note that even after the previous recession, it never withdrew the money. The money is sitting as excess reserves in banks doing nothing – doing nothing but waiting to explode like a typhoon at some point down the road. Notice – the Fed spewed trillions into the financial system and it has done nothing to withdraw it.

So if it didn’t do that in all those years since the last recession ended, how can we expect the Fed to withdraw another tranche of trillions of dollars of money? Call it a typhoon or an avalanche. They have no clue what to do.

Doctor, give that man a shot. He just got hit by a bus. Doctor says, okay, but I have no idea how to save him from his injuries. What do I do when the shot wears off? We don’t care. Just give him the shot and then we will pray.

I sound pretty cruel. But the Fed is no different than the doctor. The Covid has caused the problem in the economy. The Covid could go on for many years. Meanwhile the Fed administers more and more pain medicine today with no plan for tomorrow. 

Why don’t they do today what might be sustainable in the future? Funding unsustainable increases in the national debt is not thinking about the future. The Fed sadly is adding to our miseries – only we don’t see the typhoon yet.

False Prophets of Doom and the S&P500

Judging from much of the reporting lately, the stock market is high and rising and simply cannot sustain its lofty position. While I never predict stock prices, I can at least spout off a bit about these people who seems so sure that stock prices have to fall.

On the face of it, the intuition seems easy. The economy is horrible by most current measures (it fell 33% in the second quarter of 2020 when measured by real Gross Domestic Product) without real hope for a lasting recovery so long as Covid rages on. Meanwhile, the stock market has risen lately and has reached some very lofty numbers.

So I thought I would look at some numbers. Below I discuss data for the S&P 500. I use a measure of change in the valuations of 500 major US corporations. I did this comparison on July 29. The value of the S&P on that day was 3258.

3258 looks very impressive when compared to the end of March 2020 when it registered 2611. Wow. That pops your eyes out. In just a few months, the market rose by about 25%. Since March, the S&P rose continuously, though with a lot of variability.

We might forget that March 2020 was a very bad month for the country and the stock market. Just two months earlier in January of 2020, the end of month S&P value was 3284. In those two months, the S&P value fell from 3284 to 2611. Yikes. Ugly.

Notice that the July value of 3258 remains below the January value of 3284. So yes, we had an incredible upward spike since March, but we see that between January and July we had zero growth in the S&P. Does that sound like an unsustainable increase? Or is it simply a rebound. Bouncy ball. Ball went down. Ball came back up?

What about longer periods of time?

At July’s S&P value of 3258:

            It was 1 percent lower than in January of 2020

            It was about 7 percent higher than July 2019

            It had risen by about 8 percent per year between July 2018 and July 2020

            It has risen by about 10 percent per year between July 2017 and July 2020

What do you do with all that?

My take is that the S&P increases mostly happened prior to 2020

The most recent S&P increases still have not gotten us back to January

You might say, okay, the current increases are not remarkable, but still – why hasn’t the S&P fallen commensurately with the second quarter real GDP? Why hasn’t the stock market fully registered the worry about future declines in the economy?

And my answer is this – I don’t forecast stock prices. I don’t know how much the stock market “should have fallen.” I cannot read the minds of the public about future Covid, future real GDP, or future shooting stars.

But I do know that all those false prophets of doom have more to explain about why they are so sure stock prices have to collapse. As for me, I don’t see a sell opportunity. I guess we will see. Meanwhile there is always Jack.

 Note: I wrote this piece on July 29. It is now August 11. The S&P value on August 10 was about 3355. So it is still rising. It is about 100 points higher than the figure I was quoting above, 3258. I am glad I didn't sell in July. What about now? 

Not About Covid

Imagine what it was like in the 1940s during World War II. What did people talk about? Of course, the course of the war and what they had heard about friends and loved ones involved with the war. Today, Covid is our World War II. It’s hard to have a conversation with anyone that doesn’t eventually focus on Covid. What is it? How did it start? How does it spread? How do we stop it?

My title says this is not about Covid so you are probably wondering where this is headed. Where I am headed is to think about the source of our disagreements about it – and about recent racial incidents and about the recession, and so on.

I was walking around Green Lake talking with my friend Barbara and it dawned on us that we live in an incredibly testy world. We wondered why it had to be so ugly and non-productive. I found myself giving my standard answer – our confrontations are about extreme ideologies and the people who follow them.

But as we talked more about Covid disagreements, it seemed pretty obvious that those heated disagreements were not caused by Karl Marx or Adam Smith or Al Gore and Rush Limbaugh. Similarly, racial animosities are not so easy to predict.

So as we sidestepped a lot of goose poop and watched the geese and ducks match their cloaca, we dug deeper into our differences.

We came up with 17 causes of our differences – I know I must be able to find a couple more. Maybe you can help me. 

The truth is that those 17 are not really independent so I guess I won’t worry about the number.

As I rattle these off, keep in mind how these differences might play into your opinions about various issues today. Notice, too, which ones of the 17 come into play for a particular issue but not for others. Thus we might not see the same people lining up together to take positions on any given issue. For example, liberals might not agree with other liberals about a cure for Covid. Some conservatives may have very little in common with other conservatives as they try to resolve racial issues.

These 17 are in no particular order.

1.    Financially Selfish v Generous – you want to keep what you make/you are very charitable

2.    Inward oriented v greater good – you are focused mostly on you and your family and friends/you speak often of the greater good

3.    Philosophical purity v practical/law abiding – you adhere to a philosophical position/you like to think you do things that are efficient or practical including following the law

4.    Empathetic v rule following – you feel strongly about the plight of others/you mostly want people to abide by or not deviate from the laws

5.    Competitive v cooperative – you see much of life as a contest that you want to win/ you work with others

6.    Loyal to people v loyal to ideas – you are loyal to your spouse or your boss or your friends/you prefer to be loyal to ideas or laws

7.    Spiritual v practical – you are driven by the values of a religion/your behavior is mostly driven by practicality

8.    Religious v spiritual – you adhere to a specific religion/you mostly are driven by religious values but not a particular religion

9.    Habitual v free spirited – you are very disciplined and predictable/you are hard to pin down.

10. Rich v poor -- you were born with a silver spoon in your mouth/you were born into poverty

11. Energetic v lazy -- you love to be creative and productive/you love watching Popeye reruns and laying on the couch

12. Smart v not so smart -- biology gave you raw brain power/heredity didn't help you learn 

13. Healthy v Sickly -- you are well and maybe athletic/you are chronically ill and often need medical attention

14. You take recreational drugs v you don't drink alcohol or take drugs -- you are a little wild & crazy/you have empathy for those who need help with chemicals

15. Sloppy v Neat -- you pay attention to details/you let it all hang out

16. Huggy v Standoffish -- you love to be with people and get attached/you dislike close or emotional relationships

17. Bourbon v Scotch – okay this one is for fun and gives me 17. :-)

I am sure there are more of these. What’s missing in my list of 17?

Here’s the trick. Some of these choices put you in the D or R camps. Maybe Rs are financially selfish and Ds are generous? But surely you see that you cannot easily assign a person the same ideology or a party based on each of these very strong character traits.

And that is why I believe that Covid and recent racial tensions are not easy to parse. We are not getting predictable things coming from the mouths and behaviors of our friends and relatives and politicians.

Maybe this is good. Maybe ideological living is not good for us. Maybe we will spend more time thinking and doing less shouting and cheering? Maybe our most vexing current problems do not require an ideological basis for understanding or solution. 

I don’t know but it sure was nice walking around Green Lake in the summer.

Me, Myself, and I: International Trade Policy

Do you want to join a club? Maybe a reading club? I don’t know. Maybe those other people want to read things you don’t want to read. Maybe some of the people in the club want you to pay dues but will never listen to what you want? But then being in a reading club might make you a better reader and more knowledgeable – and maybe it will be fun. Hmm. Which way to go?

As we get closer to the election this year we are going to have to wade through a lot of bologna. Recently I was reading about the international trade plans of the two candidates. Trump is clear about “Me, Myself and I”. He has never seen a club he likes. He’s a loner. Anything “international” seems to him to be a way to take advantage of Americans.

Biden is not like previous Democrats. He does not fully embrace the idea than anything “global” is beautiful. Especially given the recent circumstances of Covid 19, he is more mindful of jobs for Americans and he doesn’t want to support any policies that might take jobs away from Americans. He is talking about industrial polices and tax policies that will keep jobs in America. “Me, Myself, and I” figures prominently into both candidates plans. 

It is interesting to me how far we have come in less than a year. I used to like free trade agreements. I used to like the idea of promoting freer trade. I liked the idea of lots of “clubs” to join. Maybe you could call that philosophy “Us, We, and Ya’ll.  Why did I like UWY? You can pronounce it like OOWE – as in OOWE G00WE was a worm.

I liked UWY because it seemed so logical. It seemed so intuitive. None of us make our own stuff. Okay maybe you grow some tomatoes. But mostly what we do is learn how to do something – call that your occupation. We earn money and we use that money to buy squash, beer, and Impossible Burgers. You don’t, in contrast, grow all your own food, produce your own steel, make your VW Bus, or any of that stuff.

Why do you do that? Because we believe in the benefits of specialization. If I tried to make my own Hawaiian shirts, they would be very ugly and probably cost me a ton. It is better for me to spend my time trying to be a good teacher and earn enough money to buy shirts from someone who really knows how to make shirts.

The idea of free trade extends these intuitive notions to nations. Why try to be a jack of all trades when you can specialize in some things, earn income, and then buy things from others? The result is that we would have much more product that way and at a better price.

I can hear you singing your favorite hymn right now. What’s wrong with this simple plot?

Several things are wrong.

First, like any club, this international scheme means we count on our trade partners to play by the rules. For example, they shouldn’t use trade policy as a big stick to gain other advantages. If Country A wants to invade Country B, they might threaten to cut off trade with B so that they ignore their bad behavior outside of trade.

Second, countries can gain by giving unfair advantages to their own workers and firms. Should we produce our own Panama Hats? We might have some great hat makers in the USA. But what if country C decides to give big subsidies to their hat makers? The world decides to buy hats from Country C instead of the US. US firms and workers are hurt.

Third, similar to the second point, countries can advantage their own companies and workers through a variety of protectionist policies including tariffs, health and safety regulations, labor regulations, and a number of other non-tariff barriers.

Fourth, transitions can be slow and treacherous. Perhaps natural economic advantages change over time? Suppose one of these changes negatively impacts US firms and workers. No cheating going on. Just change unfolding. The reality is that US firms and workers will be hurt. It will take time and much effort for those people to move away from earnings associated with declining industries – and move into more promising ventures. A 60 year-old worker might not transition easily from making hats to writing code.

Those are four things that come to mind that jeopardize a faith in free trade. We don’t want any of those things to happen.

But the truth is that we also may not want to go to the other side. We may see very negative outcomes or at least risks arising from an industrial policy that uses the deep pockets of government to routinely assist and regulate the trade of companies.  We may see negative side-effects coming from a broad and continuous system of trade protectionism.

What do we do? As usual, try to waddle through the middle.

The benefits of free trade might be a lot like the figurative free lunch. They sound good but maybe they are not what they are cracked up to be. Of course, an economy that is run and controlled by the government might have some drawbacks too. So we walk right down the middle knowing that it will be a fight to try to get the most out of free trade knowing that government will play a role. 

Like walking on a tightrope – swaying too far in one direction or the other, means a ride to a hard surface. Staying on the rope might mean a little movement either direction but not enough to topple you.

That balance is quite a challenge! I’m not sure Biden or Trump has the balance.