Spending Spending Spending

Last week I spouted profusely about Federal government deficits and debt. I likened the government to the pepperoni pizza addict who ate the whole thing last week and this week not only ate his own large pie but also finished his wife’s left over clams with linguine (with a hint of hot red peppers).

It makes no sense to me that a government that goes into debt during a national and world emergency should plan to go even further into debt after the threat is well over. This is exactly how a nation flirts with becoming the next Greece or Venezuela. I show below how it might be possible do better than we are presently doing. It won’t be easy but it is possible. Waiting will only make it much harder.

For example, the results below show that with the spending and tax revenue projected for the next 10 years we could begin to chip away at the problem of deficits and debts. But it would take a decline in benefits of major mandatory spending programs of around 20% of the 2025 estimate. Of course spreading the pain among tax revenues and other spending would reduce that amount somewhat but it gives you a feel for what already must be done to get us back to anything approximating normal. If we add even more to debt in 2016 the difficulty explodes.

One of my alert readers who awakened from a thirty year slumber asked me off line to go a little deeper into the details behind the debt numbers. So for the sake of my huge (did I say huge?) and growing cadre of faithful followers I decided to strain my eyes and crane my neck over the reams of data published by the Congressional Budget Office. The most pertinent of those data are found neatly packaged by me below.

Before boring into the numbers, let’s do a little review of government budgeting. The government loves us and therefore deems it possible and legal to take money from the mouths of our children and distribute it over Iowa from helicopters. No I am just kidding. The government has the power to tax. In America the biggest federal taxes are imposed on income of persons and corporations. They also collect something confusingly called the payroll tax when in reality it should be called the let’s be nice to old folks tax. But naming these things is not my quibble today. The government also levies about 10 million other little taxes that are often collectively named “other”. Many of you are familiar with the gasoline tax that you happily pay each time you go to the pump and then buy a lottery ticket and a Twinkie.

The sum of these annoying federal taxes is labelled as Total Revenue below. You also pay taxes to your state and local governments but we will ignore those today. The table tells you that these Total Revenues amounted to almost $2.2 trillion in 2005. And no, Donald Trump did not pay your taxes or mine that year. Below those government revenues in the table are found the expenditures or outlays which are the ways the government gives us our money back. Yes, they take with one hand and give back with the other. Well – they actually give us back more than we pay in and that is the rub because when that happens and it usually does, the government goes deeper into debt. But I get ahead of myself.

Government spending is often divided into three main categories – mandatory, discretionary, and net interest. Mandatory spending means that these categories of spending are very difficult to change because if you change them Jimmy Hoffa will get you. Discretionary spending refers to items that are usually negotiated each year by Congress, while mandatory spending is set out in laws that extend payments into the future. You might say the future amounts are contractual. Notable mandatory items in the US budget include Social Security, Medicaid, Medicare, disability insurance, and more.  Surprisingly defense and many poverty programs are included in discretionary spending. Notice that since much of mandatory spending relates to people of my age – young people have a keen interest in how these spending totals are shaping up.

Last week I wailed about alarming increases in future government deficits and debt. This week I look into how spending and tax revenues generate those scary statistics. My comments come from the table directly below. The table divides and compares budget information for ten years into the past (2005 to 2015) and ten years into the future (2015 to 2025). The first three columns give you the budget numbers for 2005, 2015, and 2025. The next four columns focus on the 10 year changes (in dollars and in percents).

The time period from 2005 to 2015 starts with a strong economy, endures a recession in 2008 and 2009, and then recovers slowly from the recession. The future from 2015 to 2025 is unknown but the CBO estimates these future numbers based on relatively slow growth but without a recession.

First, debt is rising despite large increases in tax revenues. Tax revenues will rise by $1.5 trillion in the future after rising by a little more than a trillion in the past. Revenues will increase by 48% after rising by 51%. I am sure folks in the middle class would love to experience that kind of growth in their personal incomes.  Tax revenues will reach almost $5 trillion in 2025.

Second, the big generator of total revenue is income taxes. The future will see a rise of $988 billion or about 64%. Total income taxes will rise from $1.5 trillion to $2.5 trillion from 2015 to 2025.

Third, despite huge increases in government revenue – we are planning to increase spending even more – from $3.7 trillion in 2015 to $6 trillion in 2025. Wowee – that's an increase of 64%. That increase of $2.4 trillion in the future doubles the past increase of $1.2 trillion. DOUBLES!

Fourth, in 2005 federal spending on mandatory categories at $968 billion was less than discretionary spending of $1.3 trillion. But that was about to change. Mandatory spending is the big spending hog. Notice that while spending on mandatory items will rise in the future by $1.6 trillion (69%), spending on discretionary items will increase by $232 billion or by about 20%. Notice also that these discretionary future increases come after a decade of decline (-$154 billion or -12%). As of 2025 mandatory spending will be $3.9 trillion compared to discretionary spending of $1.4 trillion.

Fifth, notice that net interest spending increased by only $39 billion in the past but is expected to rise by $545 billion in the future. This is no surprise given how long the 

Fed has kept interest rates so low. This shows you the importance of the national debt. If the debt was to return to normal we might save a lot of money on interest. 

Finally, notice the last line of the chart. This shows you that we have gone from an excess of past spending over revenues of $319 to $438 billion to a future amount equal to $1.2 trillion. If we knocked the $1.2 trillion down to something more normal like $400 billion we would reduce the excess by $800 billion. $800 billion amounts to 21% of mandatory spending in 2025. But even this change does not stop debt from rising. 

	2005	2015	2025	Chg	Chg	% Chg	%Chg
Revenues				Past	Future	Past	Future
Income tax	927	1541	2529	614	988	66	64
Payroll tax	794	1065	1531	271	466	34	44
Corp. Inc tax	278	344	421	66	77	24	22
Other tax	154	299	337	145	38	94	13
Total Revenues	2153	3249	4818	1096	1569	51	48
Spending
Mandatory	968	2299	3875	1331	1576	138	69
Discretionary	1319	1165	1397	-154	232	-12	20
Net Interest	184	223	772	39	549	21	246
Total Spending	2472	3687	6044	1215	2357	49	64
Spending minus	319	438	1226	119	788	37	180
Revenue
CBO.gov

Ticking Time Bomb: National Debt

If I had a cartoon for this post today it would show the leaders of both parties smiling merrily with gifts extended in right hands while the left hands were plunging a dagger into our collective backs.

Recall last December when champagne corks flew and Congress declared it had come together in a great spirit of compromise to save the nation? Despite years of acrimony and accusations, these folks came together on the eve of the next presidential election and selflessly compromised by removing lids on spending while keeping most temporary tax cuts in place. Selfless? Ha ha. These elected officials realized that voters are not buying government standoff and they basically made Santa looks like a piker when it comes to distributing brightly wrapped gifts for all. On Dasher. On Dancer. Ho Ho Ho.

Well, the Congressional Budget Office (CBO) got around to estimating the budgetary implications of the 2016 Compromise Bill and they are not pleasant. In fact I think it is safe to say that we have finally arrived. We have finally arrived at the point of no return, the proverbial rock and hard place. We are out of bullets, yet our emboldened leaders are bribing and drugging us as they take us to the brink

Let’s suppose you go to Bank 1 and get a loan for a car. Then you go to Bank 2 and get a loan for another car. Bank 3 helps you buy a house and Bank 4 lends you money for your education. At some point it becomes pretty clear that even if you graduate at the top of your class with your coveted degree in Tiddlywinks, you will never have enough money to pay back these loans. Then you get sick and need to borrow money for expensive medicine.The next Bank says no way Jose. And your name is not even Jose. 

You explain to Mr Banker how much you need the money and he says no again. So you decide to reduce your spending on guava jelly and even with relatively large cutbacks on Jiffs Extra Crunchy Peanut Butter, you still can’t pay your existing loans much less the new one. So you ask your boss for a raise and he gives you 10% more. Hmmm…still not enough. Not nearly enough.

Stop crying Charlie. It is just an example. This example is silly Larry stuff but it makes a simple point. It is possible for a person or a country to have so much debt that there are no good solutions to their problems. Greece, Venezuela, Argentina, and dozens of other countries now and in the past have hit those limits and the results are both clear and tragic. At the point that the tragedy becomes known we all get very interested. We start asking questions – how did we get ourselves into this situation? What can we do to make things better?

The sad thing is that it is too late to ask those questions. The time for those questions was BEFORE things got so bad. BEFORE is when you can make adjustments. Those BEFORE adjustments are painful but they are nothing like the harsh boot on your neck when the creditors come after you…and then desert you.

Many of you are betting on just how many JDs I consumed tonight. But I am pretty sober and I am not exaggerating this mess.  What is so bazaar is that the US is now in a tragic budgetary position and these people running for office do not even have a clue. I will show you CBO projections below that are alarming. But the sad thing is that no one has picked up on it. No one and no party is debating this issue. Worse – many of these government folks want to legislate even more spending when they get back together later in 2016. Wow.

Here are some facts from the CBOs latest budget projections (cbo.gov):

·        From 2000 to 2007 government debt held by the public averaged around 34% of GDP. Let’s call that normal. In dollar terms the debt averaged around $4.2 trillion.

·        Largely because of the recession of 2008/2009, the debt increased to $13.1 trillion or to 74% of GDP by 2015. Let’s call that a huge increase but partly explainable by tough times.

·        After the 2015 Budget Compromise the debt is projected to rise to $16.9 trillion in 2020 or 78% of GDP. By 2026 the corresponding projections are $23.8 trillion and 86% of GDP. Let's call that criminal neglect.

·        If I am doing my math right, in 20 years, US government debt held by the public will have grown from about $4 trillion to more than $23 trillion. That’s a roughly six-fold increase. Notice it grew much faster than the economy as the share of debt will have gone from 34% of GDP to 86%. 

How do we get debt back down to something normal like 34% of GDP? How do I fit into my wedding suit? Not easily!  In the meantime, what happens if we have another recession and the debt goes to more than 100%? What happens to interest expense and debt when interest rates return to normal levels? How do we get back to something even approximating “normal” debt? Our so-called don't even talk about it. Instead they are boldly advancing plans to increase spending (free schools, more free healthcare, more submarines, etc) or looking for the lucky beans that will raise revenues (on the other guy) or magically increase output. 

Why isn’t hell already breaking out? There is a simple answer. For the time being problems elsewhere make us look okay by comparison. We survived the world recession better than most countries but part of the reason we did so well is that we went deeply into debt. Other countries had their own pluses and minuses – but right now many are in trouble. They won’t always be in trouble. And when they return to more normal conditions we will look much less good in comparison.

Japan and Europe will gradually improve. China will bottom and recover. Many developing countries will get pulled along when the developed world improves. As all this happens, our politicians will hope nobody looks too closely at US debt. As US debt pushes toward 100% of GDP or more and as better alternative investments arise, you can bet that US and global investors will shift their money to where in the world it seems safest. At that point there will be no easy fixes. We will feel the stupidity of policymakers who make us more and more vulnerable. It will be a mess. But our current batch of policymakers today is whistling their way to the bank. How do we get their attention? 

Iran, Climate Change and Prediction Error

Mark Twain is famous for saying that "it is difficult to make predictions, especially about the future." My mother often predicted that I would become a bum.  She was right. As a happily retired guy I am sure that Betty would agree with my mom’s vision. 

Predicting the future is both necessary and humbling. Squirrels don’t have spreadsheets and mathematical models, but they gather nuts in anticipation of the coming winter. The playboy squirrels who don’t predict so well lose a lot of weight after winter arrives.  Clearly we learn from squirrels and we predict lots of things that improve our lives. But predicting the future is not an easy thing since the future by definition is unknowable. Those who take actions in anticipation of a specific future often make mistakes – sometimes very damaging ones.

Yet we predict and forecast. I grew up in Florida. During hurricane season we all become forecasters. Will that storm turn into a hurricane? Will that hurricane hit land? If so when will it hit? Where will it bring the most disastrous winds and lightning? Weather forecasters are almost always wrong when it comes to predicting these critical facts about hurricanes.Maybe that is an extreme example but I don’t think so. We modern folks with our math and models forecast a lot of things. It is important to do so. And we do so knowing that we are often wrong.

If you are still awake your mind might be wondering and thinking about all the ways we predict the future. My reason for writing today arises because of what I see as a very inconsistent approach by our present leaders with respect to forecasting some very important things.

The Obama administration is VERY sure that climate change is coming and that without major policy changes and a lot of investment, we and the rest of the world will be threatened. I think he said that climate change is our most important future challenge. There are some very important people and very sophisticated models supporting the urgent need to spend trillions of dollars to change and prepare for things that will happen in the distant future – some expected to arrive more than 50 years from now.

Despite the fact that the future is hard to predict and despite the huge sums of money involved, the president is laser focused on attending to these challenges immediately. In his and his supporters’ minds, this expenditure is worth the risk. His policy makes us all invested bettors on future climate.

Compare this aggressive approach to another important future challenge – nuclear weapons. The world is already in accord that countries will not produce more nuclear weapons. And that accord is for good reasons. While it seems highly irrational that any nation, even a rogue nation, would fire nuclear weapons at another country, we worry that all nations are not always rational. It is like the idea of someone yelling fire in a crowded movie theater. It seems quite irrational to yell those words – yet we have laws to prevent crazy or mean people from doing such things. The world has agreed to control nuclear weapons for similar reasons.

Yet the same administration that worries about climate change wrecking our countries is willing to predict that Iran and North Korea can be trusted to not yell fire in a crowded movie theater – or to not unload a nuclear weapon on one of the rest of us. Obama can vividly see water levels rising and shorelines being over run despite knowing that all this future information is model-driven and about the future 50 years from now. Yet the same Obama cannot imagine a religious zealot or a desperate dictator shooting a nuclear weapon. He cannot see those countries most threatened by nuclear Iran and North Korea arming themselves. He seems to minimize any real threat from a world with increasing amounts of nuclear weapons in the most unstable places. 

Kerry and Obama repeatedly say that the recent accord with Iran will prevent them from obtaining a nuclear weapon yet they also agree that within 10 years Iran will be able to manufacture such weapons freely. They publicly agree that after those 10 years it will take only one year to be ready to aim and fire. So why are we not aggressively trying to prevent that outcome? My grandson Nolan will not be 13 yet in 10 years. I am not particularly crazy about him having to worry about Iran or North Korea or some other despotic place. Clearly this is at least as important as the impacts of climate change on him. Right? 

So here is my question. In the case of global warming, President Obama is willing to forecast the absolute worst. In the case of Iran and North Korea his “models” assume the absolute best. Most economic forecasters that I know (who are not ideologically motivated) bring a “show me” attitude to forecasts. They are always skeptical about their model’s predictions. They always discount the certainty of what we think we know. They always follow their forecasts with a list of caveats longer than a drug company’s list of side-effects in a television commercial.

Why is Obama so sure about the intensity of climate change and so sure that Iran and North Korea will turn into the cutest and sweetest puppies? Why can't we apply conservative and consistent forecast approaches to policies related to climate and national defense? 

2% Inflation and the Fed

The Fed seems to have a thing about 2% milk. Or was that 2% inflation? It has become a passion with them. It’s like your mom when you were a kid. Honey, if you are good we will take you to Legoland. What is good Mom? To start with clean up your room. And then you should get straight Bs. Straight Bs? Why do I need straight Bs to be good – good enough to go to Legoland?

Mom knew that I would never get straight Bs. I could hardly sit in my school desk for five minutes let alone concentrate long enough to get a B on anything. The Fed has been singing this 2% inflation song for quite a while – and all during that time the chance of inflation reaching 2% was about the same as my getting straight Bs.

Why is the Fed so disingenuous? Mostly to take our collective eye off the ball. There used to be a time when the proper role of the Fed was to provide just the right amount of liquidity to the economy and restrain inflation. But then the Keynesians messed things up and suggested that since the government is totally inept, the only organization besides Donald Trump left to control the economy is the Fed. So instead of humbly trying to  dampen inflation and inflation expectations the Fed has turned into this multi-headed hydra doing everything from dunking basketballs to fine tuning the unemployment rate.

Janet has no troubling dunking so she and her fine fellows at the Fed (notice all the Fs) have spent the last 8 years or so telling us bedtime stories about monetary policy and the unemployment rate. Janet will not rest until every last legal and illegal fast-food server has a full time job with rapidly growing wages. She is still a long way from reaching that goal so she is even more dedicated. But here’s the rub. Aged economists like myself keep reminding her that at some point after she has poured enough money onto the smoldering economy she will have created enough economic and financial imbalances to sink a manatee.

Janet wants to please even old guys like me so she gives what we might call “lip service” to the idea of inflation. Janet wants unemployment much lower (and wages much higher) and will say just about anything so she can say she slayed the employment dragon. One thing she can say is – look dudes. I poured enough money on the economy to drown China and look – no inflation. Well – there is some inflation so she had to come up with a number for the perfect amount of inflation and that number is 2%. She keeps pointing out that inflation is less than 2% and she acts as if that is a bad thing. Is it a bad thing when your money buys more? Instead of saying she wants the unemployment rate lower – she chides us with this silly statement that inflation is less than 2% and that is a bad thing! Worse – she says – we must keep stimulating the economy until we can get inflation up to 2%. 

Up to 2%!!! Am I yelling? I spent my whole 169 year career thinking the Fed is supposed to REDUCE inflation. Where did we get this raise inflation crap??? It is just like those straight Bs. Mom didn’t want to take me to Legoland. Janet does not want to raise inflation to 2%. What Janet really wants is a gold star for employment achievement.

You say – but Larry – the Fed just raised the interest rate. Are you never happy? Did you never get to Legoland? Yes, I did get to Legoland and it was wonderful. As the Fed announced its miniscule increase in the interest rate it spent more words reassuring us that the future increases will be so gradual that no one will even notice. But even that tiny little interest rate increase isn't guaranteed. If ANYTHING comes up this year that has even the tiniest possibility of slowing growth in the US economy you can be sure that the Fed will end their attempt to restore a bit of normalcy to monetary and financial conditions.

2% inflation is a gimmick and it means nothing. What matters is the Fed’s progressive agenda and that it is riveted on the unemployment rate and economic growth. Mark my words. If the inflation rate rises close to or above 2% while the employment situation is not sufficiently solved – the Fed will explain why 2% was never a rigid target. The Fed will then explain why 3% makes more sense. Hey guys, is 4% really so bad? 

Why am I so mean about the Fed? The answer is that they don't read the handwriting on the wall. First, remaining issues with employment have nothing to do with monetary policy and everything to do with long-term structural issues. Loose money and low interest rates are doing little for growth and everything to increase imbalances. Second, we already see the worrisome bubbles developing that arise from near-zero interest rates. Third, if inflation does begin to rise despite little progress on employment, the Fed will likely ignore the inflation and will end up creating a very unstable stagflationary environment. Those of you who experienced all that in the 1970s know why that is not a desirable end. 

The Fed should stop this charade about wanting a higher inflation rate and just tell the truth. They are not going to stop this abnormal monetary policy until every last one of us has a full time job and wages are growing faster than kudzu. Domestic and global imbalances be damned. 

Junk Bond Bust by Guest Blogger Buck Klemkosky

There are problems in the junkyard. Liquidation of the largest mutual fund since 2008, Third Avenue’s $800b Focused Credit Fund, has intensified concerns about the health of the high-yield bond market.  Third Avenue had invested in high-risk illiquid bonds and as redemptions poured in the fund sold liquid bonds first but at the end could not sell the $800b of illiquid bonds and halted redemptions until assets can be sold. 

Another high-yield fund also stopped redemptions and one other liquidated. This was a wake-up call for investors who had been chasing yield without assessing the potential risk of high-yield bonds. The amount of money invested in high-yield bond funds has quadrupled since 2009.

High-yield, high-risk bonds are commonly referred to as junk bonds. People who work and invest in this area of the bond market would prefer the high-yield label but junk is used as often as not. Bonds are rated investment grade or speculative. Investment-grade bonds are further categorized into high-grade (AAA and AA ratings) and medium-grade (A and BBB ratings). High-yield bonds (rated BB or B or CCC) are considered speculative with only moderate protection of principal and interest. Bonds can be rated lower than CCC but usually not at issuance.

There are only three AAA-rated corporations left in the U.S.: Johnson & Johnson, Exxon-Mobile and Microsoft. Twenty-five years ago there were nearly 100 U.S. companies with AAA ratings so they are a dying breed. There has been a long-term downgrading of corporate bonds globally; for example, in 2015 more than $1t of corporate bonds have been downgraded and less than $500 B upgraded in the U.S. alone.

Prior to the 1980s, only investment-grade bonds could be issued. Any bonds rated lower than BBB had been downgraded. Mike Milken of Drexel Burnham fame started the junk-bond revolution by convincing investors to buy high-yield bonds at issuance. He has long since departed the industry as has Drexel Burnham but the high-yield bond market continues to thrive. High-yield bond issuance has set records the past five years as has the issuance of investment-grade corporate bonds.

One result of the record amount of high-yield bond issuance and consistent downgrading of investment-grade bonds is today $2t of global corporate bonds are rated speculative or junk. Corporations have been motivated to issue bonds because of low interest rates and tax advantages while investors have chased yield because high-yield bonds provide 4-5% annual yield more than investment-grade bonds. Recently AA-rated bonds yielded 2.61%, BBB-rated 4.27% and high-yield 8.5-8.8%, up from 5.8% earlier in 2015. In the bond markets, the higher the risk, the higher the return. If you really have an appetite for risk, the CCC-rated bonds yield over 18%. However, as junk-bond yields have increased and prices declined, they will suffer negative returns for the first time since 2008. A popular high-yield bond index has fallen 13.6% since mid-April 2015, prompting investor selling.

What is the downside of having $2t of corporate bonds rated junk? Evidence shows that the probability of default is much higher for junk bonds; over a 30-year period, 3.8% of these bonds defaulted annually. In 2015, the default rate was 2.6% versus 2.1% in 2014. The default rate is expected to be above 4% in 2016. During periods of crisis such as 2007-2009, the default rate skyrocketed to 15%. About 25% of high-yield bonds have been issued by energy, mining and commodity-based companies which are now experiencing financial stress. 111 companies have defaulted on $80b of debt in 2015, the highest number since 2009. High-yield promised returns look appealing in a low-interest rate world; returns after default don’t look nearly as attractive as promised yields. Unfortunately many investors have chased yields without fully understanding the risk that entails.

Sunny Davidsons: Glass Half-Full?

Happy New Year!

I spout a lot and spouting can sometimes have a negative tone. So I thought I would start the year off on the right foot. Glass half-full? Of course the glass is always half-full but in 2016 and the year of a Presidential election in the USA – we are going to constantly hear about everything that is wrong with this country and the world. The good things will easily get lost in all this negativity.

I am not saying that there is anything wrong with pointing out our drawbacks and challenges. This is the way we learn. Mrs. Montgomery my fourth grade teacher was pretty clear that punching and otherwise touching my classmates was not appropriate behavior. Today I am pretty much punch-less and I should thank Mrs. Montgomery for her constant help including the water-boarding. 

But we also know that too much emphasis on the negative can be counterproductive. My father’s name was Sonny Davidson.  Born in 1915 he was a young teen when the Great Depression hit and he decided he already had enough schooling and hit the streets. Later during World War II he passed himself off to the Merchant Marines as an electrician. After the war he was selling cigarettes on the Staten Island Ferry where he met my mom. Sonny was an eternal optimist despite being beaten back time and time again. He fought hard to put the food on the table and had at least the following occupations – taxi driver, entertainer with a stage name (Zonn Murray was a hypnotist, mind reader, magician), Miami Beach strip club manager, bar manager in Key West and then Havana, appliance salesman, appliance store owner, and then gift wholesaler. Both his appliance store start-ups ended in bankruptcy.

But if Sonny Davidson was optimistic his dear wife Marge was Mother Teresa.  Marge was born in Budapest and came to the US in 1929 – great timing mom! She met Sonny one day on the Staten Island Ferry and that was that. They moved to Miami after World War II and happily raised two sons there. They were the classical good cop bad cop when it came to raising children but always they were optimistic and forward looking. No wall was too high to climb. Thus my title today is Sunny Davidsons.

Inasmuch you see why it is so easy and natural for me to advance the glass half-full philosophy. As we march through the battlefield of 2016 it does not hurt to think about some things….

            If you are reading this you are alive. Smile.

            Thanks to innovation we have things available to us that we never even dreamed of 20 years ago. If mom was alive she would not be using something called a wash tub and ringer.

            While Russia is no pussycat, I am not a pimply teen walking around Miami waiting for a violent reaction by the Soviets over Kennedy’s Cuban Missile Standoff.

            While we are contemplating ground troops in Syria, we are not learning daily of casualties in a far-off place called Vietnam. Most people today do not even know the word napalm.

            Non-profits and charities are everywhere serving the needs of the less-fortunate and many of us are proud to serve on their boards and committees.

            Despite continuing worries about the future of the Social Security System, the baby boom is retiring in scores and receiving checks that make life easier for boomers.

            Radio stations continue to play Party Doll and other favorites from the 1950s.

            Despite lingering two-way racism and ensuing unrest, minorities are succeeding in education, work, and are no longer subject to obnoxious insults like sitting in the backs of buses.

            While many of us dislike a swollen national debt our government is not teetering on the brink of collapse as in Greece, Brazil, Russia, Venezuela, and several other countries.

            No one likes sub-par economic growth but if one looks around the world today a 2% growth rate is not bad. Consumer spending rose 3% last quarter.

            Gays can marry and are mostly treated as regular folk.

            While politics and elections are important and colorful – most of our days and hours are  filled with both frustrating and wonderful friends, family and neighbors.

Have an absolutely wonderful 2016. 

Predictions for 2016

I offered no predictions last year and therefore I can honestly say that none of my predictions failed. But I knew that your holiday would be spoiled if I did not add a few tantalizing forecasts to those you will be hearing from real experts during the next week. So I am giving you 11 predictions for the price of 10.

1.     President Obama will announce a new directive in which Michelle his wife will become Queen for life of America. Congress and the Supreme Court are unnecessary obstacles under her regime so those pesky institutions will be disbanded.

2.     Marco Rubio will grow a whole foot next year and will tower over the other candidates at the debates at 6’6”.

3.     Iran, Cuba, and North Korea will form a new country named Korcuran. After their first practice shot with a nuclear tipped ballistic missile they will explain to western friends that they have no nuclear tipped missiles and would never aim them at Israel.

4.     Vice President Kerry will be scammed by third graders posing as fifth graders at a Kool-Aid stand.

5.     Carly Fiorina will be named most congenial from among the Republican presidential candidates.  Despite constant rumors she will not marry Matt Lauer or Hoda.

6.     Bernie Sanders will lose the Democratic nomination for President but will be among the top five candidates for emperor of Korcuran.

7.     Late starters, Dennis Rodman and Charlie Sheen, will win the Presidential election next November. Both are considered to be outsiders who will stand up for the little guy while being totally unintelligible. And possibly drunk. Queen Michele Obama will protest the election. 

8.     Delta and United Airlines will soon be marketing new standing areas on their international flights. While paying for all the usual amenities (baggage, JD, etc) flyers will now have to Pee for Pay in the lavatory. If a passenger cannot remain standing during the full 18 hour flight to Australia, he or she can pay flight attendants a little extra to tie them to their poles. Let’s not stand for that!

9.     The Indiana University football team will not play anyone in the defensive backfield next year. They have brokered a deal to have 15 players on the offense and only 7 on the defense.

10.  Net Neutrality will become the law of the land next year but most people do not have a net and are not remotely neutral. In a poll taken earlier this year 14 out of 10 people did not know what net neutrality means.

11. Obamacare will not be repealed. It will be renamed Rodmancare. Among the many new benefits will be a free week with unlimited healthcare in Korcuran and a discounted round trip airfare in Delta’s new Standing Zone.

I think I am running out of steam.

I hope you had a nice Christmas and 2016 brings you everything you ever dreamed of and more. And yes, send money if you can.

Santa, Trump, and Climate Change

That time of the year has rolled around again. Despite a mountain of evidence that Rudolph is really an ISIS spy using Santa’s sleigh to collect reams of personal information, we cut down perfectly good trees, decorate them, and go deep into debt so our children will carry on these traditions.

So naturally I was thinking about Santa when I read Bloomington's Sunday (a week ago) newspaper and came upon the column by notable left-wing columnist Eugene Robinson. The last time Robinson wrote a nice thing about a Republican candidate was when….hmm….I guess I can’t remember. Robinson, like about 2 million other nationally syndicated columnists, likes to write about Donald Trump. Articles about Trump now exceed the number of emails I receive purporting to help me enlarge my male part.

Here is what Robinson says about two-thirds through his article – “It’s not that Trump will do the impossible, it’s that he might do something.” It was this statement that got me thinking and that isn’t easy on a Sunday morning after the annual Christmas tree decorating party that included a brand new half-gallon bottle of JD. This statement by Robinson made me see the glowing connections between Santa, Trump, and Climate Change.

Let’s begin with Santa. We adults, except for Jason, all know that Santa brings no gifts with Rudolph and his sleigh.  As Robinson says, Trump won’t do the crazy stuff he yells about. But we love it when Trump reams the big guys. It’s like we all love it when IU almost beat Ohio State in football. We cheered like crazy knowing that our IU guys would not really win. We’d like to think that we might have won. That’s enough for Hoosiers. We love to tell our kids about Santa and Mrs. Santa and his workshop and shimmying down chimneys drinking milk and eating cookies. We love it because it makes us feel good. We love Trump because he say's things that most people would not say. 

That leaves us with another article that was published Sunday December 13 about climate change. President Obama was quoted in this article as saying, “The climate pact offers the best chance to save the planet we have.” I am not sure about you but the minute I saw that statement the first thing that came to mind was Supergirl. Don’t tell me I am not liberated!

There is a photo in that newspaper article with several key players of the United Nations with thumbs up and hands clapping. The title of the article is, “Historic pact to slow global warming is celebrated in Paris.” Ban Ki-Moon, not related to the infamous Reverend Moon said, “The Paris Agreement on climate change is a monumental success for the planet and its people.”

You would have thought that the representatives of 190+ countries had found a way to stop comets from intersecting with the Earth – or they had eradicated Aids or Pancreatic Cancer. Or maybe they agreed that Iran should name Christmas as an official holiday.

No, these representatives apparently did something monumental to save the plant from climate change. Already you are labeling me a climate change denier. That way you can dispense with me as just another fruitcake from the right. Never mind that. I am saying that you folks who are not climate change deniers have been duped in the usual ways by the usual people. If you care about climate change you were sold down the river by the 190+ smiling government officials.

These people punted every possible real issue. Folks there ain’t no Santa Claus and this agreement has done absolutely nothing to save the planet earth.

Your mom says "go do your homework". But she does not tell you when you have to do your homework. Nor does she tell you how much homework you have to do. Your mom says you have to self-report how much time you spent on your homework. But there are no penalties if you don’t do your homework. Maybe she will frown at you. You agree to do your homework when your friends do their homework but there is no mechanism for your friends to do their homework until they are 45 years old. Even then there are no penalties if they don’t.

No, I am not going to do the boring work of repeating all of the silly things in the agreement that are making so many people pop their corks. But here are a few examples of the silliness as expressed with the words of the contract:

By “some point” somewhere around 2050 emissions need to be reduced to low levels. I checked my calendar and Grandson Nolan will be almost 38 years old then. He is 2.5 now.

Countries are “expected” but not required to meet any targets

Since the agreed targets are insufficient, countries are asked to review them in four years to “see if they can update them.”

There are no penalties for missing targets

Richer countries “should” continue to support the poorer countries. China is “encouraged to pitch in on a voluntary basis.”

I think representatives of those 190+ countries should be asked to sign a statement that says that Santa is real and that Trump has nice hair.  We will then all feel a lot better.

Adam Smith and Prudent Man

Last week on December 8 the Wall Street Journal had two articles on page A15. In their Notable & Quotable column is a quote from Adam Smith from his “The Theory of Moral Sentiments” (1759). The second article is titled “Dissensus, the Spirit of our Age” by Joseph Epstein.

So today I am taking a departure from my usual Macro-paranoia to discuss the ways we speak to each other. My spell-checker does not like the word Dissensus but we all know what that means. It means we don’t agree. And when we disagree we are often emotional if not violent. I suspect that dissensus has always been around but to me it seems a lot worse today.

Perhaps our problems are more severe now – but I doubt that is the case. I recall too well being at Coral Gables High School and wondering before his horrible assassination if President Kennedy was going to start a war over missiles in Cuba. I remember the draft and Vietnam. I remember that blacks drank from separate drinking fountains and were required to sit in the back section of city buses. None of that was fun or good. We had plenty to argue about.

Yet despite the extreme and seeming intransigent problems we faced, many of us were able to find less strident ways to disagree. The Epstein and Smith articles ask us to think about this issue. Epstein emphasizes that people – even people with strongly held views – thought it more prudent to look at both sides of a question before leaping to vote for a candidate. Today many of us seem to have reflexively made-up our minds. Epstein thinks that we used to cogitate more and only decided after much weighing of facts.

Smith is copied below. His wording seems a little archaic and his descriptions of prudent man might be considered by some old-fashioned. But the father of the free market and the “invisible hand” says things we probably should not forget. Among the gems below are that the prudent man:

            studies seriously and earnestly

  may not be brilliant but they are always perfectly genuine

            is not ostentatious

            is simple and modest

            does not always think of cultivating the favor of those little clubs and cabals

 neither endeavors to impose upon you by the cunning devices of an artful imposter, nor by the arrogant airs of an assuming pedant nor by the confident assertions of a superficial and imprudent pretender.

More of Smith is at the bottom below.

Should we not passionately disagree? Of course we should. That is not my point today. My point is that we seem to rush judgment. We share with some others a complete and well-outlined ideology that has its own dos and don’ts. Am I saying you should not have an ideology? No. But what I am saying is that perhaps there are some important things that fall between the cracks.

One example is abortion. That topic has some of you already taking deep breaths. But in a democratic nation with divided views it is hard to  imagine moving to an extreme state in which we had either no abortion or totally free choice for abortion.  Today we have laws that allow it but regulate it. Realistically the laws will bounce around over time. Sometimes we will make it harder to get abortions for good reasons. Other times we will do the opposite – for good reasons. This is where the thinking comes in. If we are never going to move to either ideological extreme then it seems that knowledge and analysis ought to be used by both sides to decide on the best current solution. That hardly ever seems to be the case today. 

The same goes for income distribution or poverty programs. Extreme ideology supports widely divergent policies – virtually no social programs or greatly expanded state public assistance. Reality finds us between those ends. We can shout ugly epithets at each other – or we can be more like Smith’s prudent man. Would not a left-winger be willing to discuss waste in current programs? Might not the conservative believe that society could gain by assisting some families? The idea that knowledge and common sense can be brought together for our mutual gain seems valuable. The more important the policy topic the more important that we arrive at good decisions.

If we continue to go down the path of dissensus we will live by reality TV. Instead of prudent man we will live by the dictates of finger-pointing. It is hard for me to believe that we would continue to choose the latter.

Adam Smith, “The Theory of Moral Sentiments” (1759):

The prudent man always studies seriously and earnestly to understand whatever he professes to understand, and not merely to persuade other people that he understands it; and though his talents may not always be very brilliant, they are always perfectly genuine. He neither endeavours to impose upon you by the cunning devices of an artful impostor, nor by the arrogant airs of an assuming pedant, nor by the confident assertions of a superficial and impudent pretender. He is not ostentatious even of the abilities which he really possesses. His conversation is simple and modest, and he is averse to all the quackish arts by which other people so frequently thrust themselves into public notice and reputation. For reputation in his profession he is naturally disposed to rely a good deal upon the solidity of his knowledge and abilities; and he does not always think of cultivating the favour of those little clubs and cabals, who, in the superior arts and sciences, so often erect themselves into the supreme judges of merit; and who make it their business to celebrate the talents and virtues of one another, and to decry whatever can come into competition with them. If he ever connects himself with any society of this kind, it is merely in self-defence, not with a view to impose upon the public, but to hinder the public from being imposed upon, to his disadvantage, by the clamours, the whispers, or the intrigues, either of that particular society, or of some others of the same kind.

The Oil Glut Grows by Guest Blogger Buck Klemkosky

The International Energy Agency (IEA) has estimated that crude oil inventories have swollen to 3 billion barrels, the highest level on record, representing more than a one-month global supply. Many oil tankers, typically used to deliver oil, have been converted to floating storage with more than 100 million barrels of crude oil sitting in tankers offshore as the oil glut fills on-land storage to near capacity. The economics of storing oil for future delivery is no longer profitable as storage rates have increased dramatically, meaning some of the 3 billion barrels will be taken out of storage in 2016 and 2017. In addition, the U.S. strategic petroleum reserve is at its 720 million barrel capacity as well as China’s and other countries.

The oil glut has grown because supply exceeds demand by approximately 2 million barrels per day (b/d), 96.5 million b/d of supply versus 94.5 million b/d of demand. This is due more to supply increases than demand. Most major oil-producing countries have ramped up production including Russia, Saudi Arabia, Iraq, Iran and several others. Meanwhile, oil production in the U.S. has proven more resilient than expected although its 9.2 million b/d production is expected to decrease in 2016 but not significantly enough to offset increased supply from other countries, especially Iran as economic sanctions have recently been lifted. The growth of oil demand has increased by 1% annually over the last decade and growth is not expected to increase going forward. Much of the increased demand has come from China and other developing countries but their economic growth has slowed dramatically. Peak demand is now of more concern than peak supply.

The fall of oil prices (West Texas Intermediate) to less than $40 in 2015 will have repercussions for the U.S., some positive and some negative. The energy industry was the big driver of employment growth and corporate investment since the Great Recession of 2007-2009. Already $200b of global projects have been cancelled or delayed and more than 250,000 workers have been laid off. Two-thirds of the oil rigs in the U.S. have been taken out of service. The Keystone XL pipeline has been vetoed but that will not have much impact as the U.S. already imports 3.4 million b/d of oil from Canada out of 9.5 million b/d total. Overall lower oil prices will be a plus for importing countries such as the U.S. as lower gasoline and fuel prices put more money in consumer pockets. The real hurt will be felt by the major oil-producing countries and companies as all of the OPEC countries, including Saudi Arabia, are facing huge fiscal deficits. Forty North American exploration and production companies have already declared bankruptcy with more to come.

It is difficult to predict oil prices but the IEA estimates that the best-case scenario for oil prices is $80 per barrel by 2020 and the worst case is $50 per barrel. Geopolitical instability in the Middle East is always a possibility and Saudi Arabia has recently stated it would like to see oil stabilized at a higher price. But Saudi Arabia has not committed to cutting production to balance supply and demand which has been its role for several decades. If low oil prices are the new normal, the U.S. will be a net positive beneficiary as consumers will enjoy lower energy prices for several more years.

Export Doldrums: The Little Engines that Couldn't

Americans earn income when they produce things and get paid for the production. Our nation produces lots of things. Pfizer has been in the news lately because they are merging with another company. Pfizer makes Viagra. That makes a lot of people happy but I won’t go into that because some of our readers might take offense. We also make guns and houses and the list goes on and on. We also produce services. In fact the majority of what the nation produces is classified as a service. If you work at Macy’s you get paid the minimum wage or less to perform the sales function. If you are an Uber driver you get paid each time you deposit someone at a desired location like LaTorre’s Mexican Restaurant. If you sell tickets for cruise ship voyages you receive income so that people can gain about 50 pounds and see the shorelines of very interesting places.

In 2014 USA National Output or GDP was $17.4 trillion dollars. Wow. That is a pile of stuff! Of that amount $7.9 trillion was for consumer services and pretty much the rest was for goods sold to consumers and goods and services purchased by businesses and governments. In 2014 we imported goods and services of about $2.8 trillion and we exported $2.3 trillion.

It is those exports that I want to focus on today. Look at it this way – we produce stuff at home and sell it to people both here and outside the country. Let’s call the local buyers Pete and those offshore buyers Charlie. If we are US policymakers we want Pete and Charlie to buy a lot of US stuff. When they do that all kinds of good things rise – output, profits, jobs, wages, and so on. Please, no Viagra jokes. We have problems in the USA presently because neither Pete nor Charlie are on a spending spree. So the economy limps along.

I will pick on Pete another day but the question today is what happened to Charlie? And that’s what the next 117 pages are about. If you are in Colorado or Washington light up your favorite smoke and hold on. Otherwise JD works well. 

The first thing to keep in mind is that the US, unlike some other countries, is not dominated by export sales. That $2.3 trillion of foreign sales is only about 13.2 percent of GDP. If that figure was half of GDP then what I am about to say below would be alarming. But since export sales are 13.2% of GDP that means what foreign buyers do is important but it also means the 86.8% of local buyers are much more important.

But we talk about local buyers all the time so let’s spend a little time investigating foreign sales or exports.

Who buys our crap? Mostly people who are close by – Canada and Mexico are the two top foreign destinations for US goods and services. Together they bought $646 billion in 2014. That amounts to 28% of all US exports. Next in line were China and the UK. Below are the top 12 destinations for US goods and services. Together these 12 countries purchased in 2014 $1.4 trillion or a little over 60% of US total exports to the world.

            

            Canada

            Mexico         

            China

            United Kingdom

            Japan

            Germany

            Brazil

            South Korea

            France

            India

            Saudi Arabia

            Italy

If the US economy has been slowing down because Charlie is not buying as usual, then we should be able to see this in the data. So I compared two 8 year time periods for evidence of change: 2000 to 2007 and 2007 to 2014. It turns out that exports grew much slower in the latter period compared to the former. The next table shows the increase during 01 to 07, the increase during 08 to 14, and the differences. Data are from www.bea.gov 

  

US Export Sales to the World from 2000 to 2014.

                               0 to 7  7 to 14  Diff

Canada                   2297  1802     -495

Mexico                   1515  1068     -447

China                        897     345    -552

United Kingdom       773     645    -128

Japan                         760     735     - 25 

Germany                   531     421    -110

Brazil                        415     178    -237

South Korea              404     291    -113

France                        333    268      -65

India                           225      93    -132

Saudi Arabia              154      75      -79

Italy                            171    143      -28

   Total                      8474   6064  -2410

0-7 is the sum of US exports during the years 2000 through 2007

7-14 is the sum of US exports during the years 2007 through 2014

Diff is the difference between the first two columns

A negative number for Diff means lower export sales in 2007 to 2014

Numbers are in billions of dollars

The key point is that US exports have slowed dramatically. From 2000 to 2007 the US exported a total of $8.5 trillion in goods and services to the top 12 country destinations. From 2007 to 2014 we exported less, $6.1 trillion. The difference is not small -- $2.4 trillion! That is a 28 percent reduction.

While China explained about one-fifth of that seven year decline – notice that US exports slowed to every one of the top 12 country destinations. All 12!  Between our NAFTA partners Canada and Mexico we explain almost a trillion of the decline.

These declines do not come from one country or one part of the world. Economic problems in Europe, Asia, South America and even the Middle East all contributed to weakness in US sales abroad. As these countries suffer economic recessions and slow growth, their people are able to buy less. They buy less at home and they buy less from other countries, including the USA.

Next we turn to economic projections for these 12 countries. Expectations of stronger growth abroad would translate into a stronger demands for US goods and services. Below is a table I generated using economic growth data from the IMF World Economic Outlook (October 2015) Tables A2 and A4.

                    97-06  07-15  16-20
Canada          3.4     1.6       1.9
Mexico          3.3     2.1       3.1
China             9.4     9.1       6.3
UK                 3.1     1.0       2.2
Japan              0.9     0.4       0.9
Germany        1.5     1.1       1.5
Brazil             2.7     2.7       0.8
S. Korea         4.9     3.4       3.4
France            2.4     0.7       1.7
India               6.6     7.3       7.6
Saudi Arabia  3.9     5.0       2.7
Italy                1.5   -0.8       1.2
Average          3.7    2.8       2.8

           

Column 1 is the average annual growth rate of  Real GDP for each country from 1997 to 2006. The second column has average growth rates from 2007 to 2015 (the 2015 number is a projection for the year made in October of this year) and the third column averages the predictions for the IMF for the years 2016 and 2020. 

We see two things from this above table. First, the economic growth rate of the main US trading partners declined significantly after 2006. Every country except for India and Saudi Arabia (Brazil's growth rate did not change) slowed considerably in the 2007 to 2015 time period. This helps to explain the major reductions in US exports during those years. Incomes of our trading partners slowed or declined --- and they purchased less from the USA. 

Second, the IMF is not expecting things to improve in the next five years. The 12 country group's average GDP growth will not improve at all. Looking at our top three destinations only we see a big improvement expected in Mexico, a small gain for Canada, and a continued decline in China. India is expected to grow faster while Brazil and Saudi Arabia will suffer continued growth problems. 

Exports are not everything to the USA -- but they are important. If we believe the IMF's economic growth forecasts it is difficult to see any real hope for an export led resurgence of growth in the USA. As I wrote last week -- free trade agreements are the right thing to do but in this slow global growth environment it is difficult to believe that countries will approve a strong agreement and even with such an agreement, income problems will swamp any gains that might come from trade-opening agreements. The world needs a locomotive but it is unclear who will play that role.