A Tale of Caution

January 31, 2021

by Steve Stofka

The trading in GameStop (GME) has spurred romantic visions; a mob of peasants has stormed the castle and the nobles have fled! Huzzah! This love of the romantic convinced a bunch of peasants to storm the Capitol on January 6th. We are human beings; we love stories. The truth is less appealing or ordinary.

At a press conferences this week, the well-prepared and even-tempered White House Press Secretary, Jen Psaki, was asked if President Biden planned to speak to the issue of the volatile trading in GameStop (GME). She said that it was a new age; the President was not going to speak to issues he had no expertise in. Imagine that. We will miss the enjoyment of watching former President Trump standing in the White House driveway and opining to reporters on every topic under the sun.

Reporter: “Mr. President, what’s your source on that?”

Mr. Trump: “My mind. I have a very smart mind.”

Without the daily source of ridicule that Mr. Trump provided, comedians are having to write new material.

But I digress. GameStop. Twenty-five years ago, internet stocks were taking off. Message boards at AOL, CompuServe and others lit up with stories of “Ten baggers,” the holy grail of stock investing. Buy a stock for a $1 and watch it rise to $10. Those in Bitcoin have experienced the heady feeling.

That romance incentivized peasants to join the Crusades; there was gold in Solomon’s Temple at Jerusalem. Thousands poured into the California gold fields in the hopes of striking it rich. The people who get rich are the ones selling pickaxes and panning tools to the miners. The gold is not in the hills but in the people digging up the hills.

On message boards in the 1990s we learned about options. Instead of buying Microsoft stock, an investor can buy options to buy Microsoft’s stock. If Microsoft’s stock is selling for $25, it costs $2500 to buy a 100 shares, the minimum lot. At that time, buying less than a 100 shares cost a lot more in commissions. If an option were selling for $1, an investor could buy 2500 options! If the price went up $5 you could quintuple your money. Imagine making $10,000 in a few weeks.

People quit their jobs to day trade. The successful ones were cautious, taking profits quickly, not taking too many risks. Someone with a family to feed and rent to pay must be responsible. A modestly successful trader can convince themselves that they have a well-balanced strategy.

About a year before the internet stock bubble blew up, someone posted a rather long post on a message board. Since he was in the options business, a family member had asked him for his advice. Aware for the first time that inexperienced retail traders were taking positions, he offered his advice, which I will paraphrase. A few points stuck with me.

Options are tools. 94% of options trades expire worthless. Professional traders use options like car insurance. Yes, there are some companies who take risks, but most of those in the business use options to mitigate risk.

Understand that multi-national companies pour hundreds of thousands of dollars into news gathering, sophisticated computers and programming by very smart people to develop and deploy options strategies. They are on the other side of the trade.

A retail trader may get lucky. The prospects for Company A improve, the stock goes up and the trader makes money. A company using options aims to make money whether the prospects for Company A improve or deteriorate. A successful racetrack makes money no matter what horse wins.

Gamblers at a racetrack can rush the window in the closing moments before a race begins and cause the track to lose money on that race because the track doesn’t have the time to change the odds to layoff the bets. With the advent of the internet, a group of retail options traders could do the same with a hedge fund, who can’t lay off the bets fast enough. It could be done but it would be difficult.

25 years later, it has become much easier for gamblers to rush the betting window. The success of those traders will no doubt inspire others to try the same strategy. An industry which uses options to mitigate risk on trillions of dollars will not let a few retail traders upset that market for long, so don’t gamble with the rent money.

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Photo by Kay on Unsplash

The Lion’s Roar

January 17, 2021

by Steve Stofka

After encouraging a rush on the Capitol building, the man whom the Russians helped get elected in 2016 is stepping down. 25,000 troops have been deployed to protect the area around the seat of power during Inauguration week, turning Washington, D.C. into a green zone like that of Baghdad in the aftermath of the Iraq invasion in 2003.

Around the country, governors have deployed troops to protect state capitols against threats of violence. At a news conference this week, Ohio’s governor was asked how many groups had applied for permits to peacefully demonstrate. His answer – none.  He promised an aggressive response from troops stationed around the capitol in Columbus.

On the C-Span call-in show Washington Journal some callers made an equivalence between BLM protestors defacing statues and breaking into stores with the assault on Congress. Fox News posted a graphic comparing the summation of hundreds of summer protests with one event on January 6th, pointing out that Jan. 6th wasn’t so bad. Hundreds equals one.

The Russians had a small influence in Mr. Trump’s 2016 election. The media – mainstream and not so mainstream – gave him the megaphone, the broadcast time and let him roar. Anderson Cooper of CNN explained that he was available when other presidential candidates were not. Media channels need to fill airtime and retain viewers. That’s the way it is.

Mr. Trump’s entire presidency has been a media feast. He likens himself to a lion, paying particular attention to his mane. He spent four years roaring his thoughts and emotions on social media, then watched them echoed on Fox News an hour later. He surrounded himself with sycophants seduced by the chance to pull the strings of the nation’s dancing puppets. He gloried in his power to dominate but lamented the fact that his pride of supporters were so low class. A great lion deserves a good pride.

By his own account, he was the greatest president. He was certainly a president without precedent. Being impeached twice in one term earns him a place in the history books. He inherited a low unemployment rate of 4.6% from the previous administration and, before the Covid crisis, helped lower it to 3.6%. Presidents have far less influence over the broad economy, but they are the ones that wear the crown of roses when the economy is good, and the dunce cap when it is not so good.

During the four years of the Trump administration, the country will likely come close to the $6.8T deficits that it accumulated under eight years of President Obama. Mr. Trump inherited a healthy economy from his predecessor but wanted robust growth, besting some of the growth during the Reagan years. He gambled that big tax cuts for the wealthy would induce them to invest in more domestic manufacturing, that the economic growth would compensate for the loss of tax revenue. It didn’t.  

Christian Nationalists applauded him for moving the capital of Israel to Jerusalem and appointing a roster of right-wing judges to the courts. Their project is to turn the U.S. into a theocracy like Israel, Iran, and Iraq, ruled by leaders of one religious sect. Mr. Trump was a warrior king, like David, and like that ancient Biblical figure, was driven by his character flaws. Instead of white KKK bedsheets, his followers donned horns and capes and grabbed pitchforks as they stormed the castle of Congress, determined to turn the Capitol into the cathedral of a white Christian nation, the New Jerusalem.

Mr. Trump certainly got our attention. Americans are a hard-working bunch, yet we found time to jab him with rancor or praise his pitchfork rhetoric. He was either a menace or mensch. His was not a neighborly disposition; he shoveled coal into the flames that power the engine of American politics.

After touching the snarling beast that hides within our body politic, we now turn to a more measured man, Mr. Biden, in the hopes that there is some sense of cooperation left in our soul.  We see our Capitol surrounded by barriers and remember the words that Mr. Rogers sang, “Won’t you be my neighbor?”

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Photo by Catherine Merlin on Unsplash

America Thirsts

October 18, 2020

By Steve Stofka

“America First” was a rallying cry of the 2016 Trump campaign but the isolationist sentiment and the name go deep into our country’s past. It is more fundamentalist than conservative, gathering its supporters from the far right. An America First Committee formed in 1940 as an opposition movement to America’s involvement in World War 2. After Pearl Harbor, it was disbanded, but an America First Party fielded a fundamentalist candidate in the 1944 election.

Was Mr. Trump the first to adopt the slogan for an election campaign? No. Both Woodrow Wilson and Warren G. Harding used the phrase a century ago. The journalist and 2000 Presidential candidate Pat Buchanan ran under the banner of the Reform Party. Known for his isolationist stance even when he worked in the Nixon administration, he famously – or infamously – cost Al Gore the election in the 2000 election. Because of his placement on the ballot next to Al Gore’s name, many voters who had voted Democratic incorrectly marked Buchanan on their ticket.

Russia and China would prefer that America stay out of world affairs. Our intelligence agencies have confirmed that Russia is actively working to re-elect Trump. When pulled the U.S. out of the Iran treaty, that left Vladimir Putin holding the major foreign influence in that country.

While China has had its difficulties with Mr. Trump’s erratic trade policies, they prefer someone who pays more attention to his poll numbers and the daily fluctuations in the stock market. Both countries needed an American president with little experience of international politics; someone who does not read his intelligence briefing book; someone who uses a large sharpie to sign his name because he doesn’t write much but his name. While Mr. Trump stumps around on the stage of American politics, Russia and China gain more influence daily. He has become America’s vulnerable spot in global affairs.

Mr. Trump’s business philosophy is not isolationist; he owes hundreds of millions to Deutsche Bank. He owns a golf resort in Scotland and has tried to build a hotel in Russia. This week he joked – I think it was a joke – that he might have to leave the country if he loses the election. He might do so to avoid the many legal proceedings against him for election fraud, financial fraud, and securities fraud. Perhaps he will build a golf course or a hotel in Russia, where Mr. Putin will protect him from extradition.

Americans thirst as they line up at early voting polling places. They thirst for someone less headstrong, someone more mannered and less combative, someone who reads, someone who prepares, someone who takes the job of President seriously. Americans thirst.

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Notes:

Photo by Aaron Burden on Unsplash

The Urban Refugee Crisis

Photo by Julie Ricard on Unsplash

September 13, 2020

by Steve Stofka

In popular urban areas, affordable housing has been a persistent problem. Housing costs can consume 50% or more of a working person’s pay. Urban residents have become refugees in their own city, living in tents on downtown sidewalks.

Homeless tent “cities” in urban areas were already a problem, and the Covid crisis has exacerbated the situation. The tent areas are a breeding ground for 19th century diseases like cholera and typhus (Gorman, 2019).

The free market has not been able to solve this problem. Wanting to maximize his return on a property investment, a developer has more incentive to build luxury units than lower cost condos or apartments. Are they greedy and rapacious? Let’s take the developer out of the equation. Imagine telling a farmer that they must dedicate part of their land to growing more affordable wheat when rye is twice the price. In front of capitol buildings in mid-west states, there would be tractor protests by farmers. So why should it be different with a developer? They have an asset, an input, and want to get the most out of that asset.

Cities have tried several solutions with poor results. Santa Monica, a destination city in California, passed a rule that 30% of new multi-family housing had to be affordable units. Residential building has come to a halt (SCAG, 2019).

The city and state of California have passed funding laws to support affordable housing, but it is expensive (Camner, 2020). In popular coastal states where taxes are already high, a proposal of affordable housing subsidies to developers arouses ugly passions.

Affordable housing is a negative externality, a cost not borne by the developer or the buyer of a upclass condo or townhome. Perhaps there should be a fee on each unit? The cost of the externality is so expensive that the high per unit fee would limit sales of new units and raise little revenue to build affordable housing.

Let’s suppose that a couple buys a new condo from a developer. The couple has paid in the 75th percentile of housing prices in that area, but they enjoy ocean views and the cultural and social amenities of the neighborhood. In front of their new condo complex, several homeless people pitch tents on the public sidewalks. The couple is outraged. For the price they have paid, they reason that they should not have to endure the sights and behaviors of the homeless. The couple complains to the developer and the city. An urban economist would understand that the couple shares some tiny responsibility for the homeless problem but they, and their fellow residents, are bearing the costs out of proportion to their responsibility.

If there were a way to cut up and distribute the homeless problem among all the residents of an area, the problem might not be so noticeable. Fortunately, we live in a society that does not dismember human beings to achieve a perfectly equitable distribution of society’s costs. There will always be what biologists call a “clustered” distribution of homeless people.

Planned refugee camps have better health conditions than tents thrown up on a sidewalk. Should a city like Santa Monica accept the clustering problem and house their homeless in urban refugee camps? The city could provide better sanitary conditions and perhaps build a clinic at the refugee camp that would relieve downtown emergency rooms of attending to the many medical needs of the homeless.

In want of a perfect solution, our society has created an ever worsening problem. If the homeless can abide living clustered together with little privacy and no sanitation on a public sidewalk, then they would certainly abide a tented refugee camp with a bit more order, sanitation and medical facilities nearby.

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Notes:

Camner, L. (2020, February 10). Santa Monica’s affordable housing policies have failed -. Retrieved September 11, 2020, from https://www.smdp.com/housing-policies-have-failed/185877

Gorman, A. (2019, March 11). Medieval Diseases Are Infecting California’s Homeless. Retrieved September 11, 2020, from https://www.theatlantic.com/health/archive/2019/03/typhus-tuberculosis-medieval-diseases-spreading-homeless/584380/

Southern California Association of Governments (SCAG). (2019). Profile of the City of Santa Monica, p. 12. Retrieved from https://www.scag.ca.gov/Documents/SantaMonica.pdf

Making Sense

May 10, 2020

by Steve Stofka

65 years ago, the scientist and author Isaac Asimov published a novel “The Naked Sun” (Asimov, 1956 – Wikipedia).  A robot detective investigates a murder on Solaria where the inhabitants rarely have physical contact with each other. They teleconference via holograph TV. How did we become characters in a science fiction novel?

The Metropolitan Museum of Art is closed but online visitors can look at some of the collections (MetMuseum, n.d.). Via Zoom, patients can have HIPAA-compliant remote sessions with their therapist (Zoom, 2020). When a friend had a fever, his doctor performed a preliminary screening remotely. Some questions. Tilt your laptop screen down a bit. Hold your head in that position. Good. Open wide and turn slightly to your right. Shine your flashlight down. Hold it there. Turn back toward me. Tilt your head down and to the left. Ok.

The monthly employment was released on Friday. In two months, the unemployment rate went from less than 4%, one of the best in the past century, to 15%, the same level as 1940, when eleven years of a Depression economy had ground the American spirit into a permanent state of disbelief. Industrial production in April was the lowest ever recorded. Annualized auto sales dropped below the levels of the financial crisis in 2008-9.

This country is a world leader in data collection. “Just the facts, ma’am” was an iconic trope of the mid-century TV show “Dragnet.” Because this is the land of so many uncomfortable truths, we shy away from facts. This is the land where boosterism was invented. Thousands of people were drawn to Midwest and western towns by exaggerated claims of opportunity (NEH, n.d.). The taking of land from native peoples, the dismal performance of untrained cavalry in battle against the Plains Indians, and the repeated breaking of treaties were conveniently suffocated by editors and publishers who wanted to appeal to newly arrived European immigrants on the east coast. Those who reported the facts were asked to change their stories to make the settlers and the soldiers look heroic. If Indian people had bought books and magazines, the editors might have portrayed them in a better light.

In the 19th century, most people grew their own food. It was and is hard work. After exhausting the soil many families either worked for a larger farmer or moved to another area and started again. Slavery was a convenient institution for an agricultural economy. Centuries of abuse by Southern landowners were buried in the landfill of American history.

For the next century, scholars in economics, history and social studies will tell the story of this pandemic. High school students will have to remember facts about the pandemic and produce an essay of 250 words for the AP history exam. The people who suffered through the pandemic will be marked by a million graves in cemeteries across the country.  The businesses that faltered and fell will be forgotten.

The economic data produced during this era will become a benchmark for future generations. A record drop in employment, in production, in retail sales, etc. The policies enacted in response to this crisis will certainly influence future generations. Our institutions are shackled by the chains of historical crises.

Former Presidential candidate Andrew Yang ran on a platform of a Universal Basic Income (UBI), a monthly payment to all Americans as a substitute for the dozens of housing, food and education subsidies that clog our bureaucracy and contaminate our politics. His supporters –  the Yang Gang – continue to support this common sense platform. It is simple. It gives people dignity and some control. Mr. Yang could not gain popular traction among Democratic voters. The party thrives on complex bureaucratic programs that require a lot of administrative staff. Simplicity is a long word that many Democratic politicians cannot spell.

Had such a monthly program been in place, a lot of suffering might have been avoided.  The IRS reports that it has sent out stimulus checks to one-third of the population (Keshner, 2020). Are you in the fortunate group who has received the funds? Millions of people are waiting for their stimulus check. Millions of applicants anxiously await their unemployment checks. The state systems are overwhelmed by the number of people applying for benefits. Food banks are reporting even more demand than they experienced during the financial crisis.

We live in a highly developed and educated society, but we respond to crisis with our monkey brains. Each of us has a unique sense of what is fair, and injustice triggers our sense of outrage. Politicians know this. They work hard to control the policy levers. They need us to vote for them. A monthly check to everyone does not secure political loyalty from anyone. Mr. Yang, stop making sense!

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Photo by Craig Whitehead on Unsplash

Asimov, I. (1956). The Naked Sun. Retrieved from https://en.wikipedia.org/wiki/The_Naked_Sun

Keshner, A. (2020, May 8). IRS has paid out over $218 billion in stimulus checks. Retrieved from https://www.marketwatch.com/story/the-irs-has-already-paid-out-over-half-the-stimulus-check-money-heres-where-it-went-2020-04-24

Metropolitan Museum of Art. (n.d.). Retrieved from https://www.metmuseum.org/

National Endowment for the Humanities (NEH). (n.d.). Boosterism on the Prairie. Retrieved from https://publications.newberry.org/makebigplans/node/3162

Zoom. (2020, April). Video Conferencing, Web Conferencing, Webinars, Screen Sharing. Retrieved from http://zoom.us/. HIPAA Compliance Document. https://zoom.us/docs/doc/Zoom-hipaa.pdf

Holiday Snacks

November 24, 2019

by Steve Stofka

I’ll keep it short this holiday week and pass on a few things that caught my attention. The comedian John Oliver called it “whataboutism.” When accused of something, point to someone else and say, “What about them?” I thought the term was new, but Wikipedia says it goes back to 1960s Russia (Wikipedia, n.d.). I did it when I was a kid. My kids did it. In Russia, the practice is a national pastime.

In the impeachment hearings this week, several Republicans repeatedly defended their President of crimes by raising up the Steele dossier. Not familiar? There’s a book out by the two former Wall St. Journal reporters who formed Fusion GPS (NPR, 2019).  It’s the same argument Republicans gave to accusations regarding wiretapping at the Watergate complex.

Until the Supreme Court decided the 2000 election in Bush v. Gore, I thought the judiciary was above this. They were not. The decision was a rare one for the Supreme Court and it was careful to note that the decision set no precedents (Oyez, n.d.). A few months later, the stock market began its hard fall from the dot com boom, China was admitted into the World Trade Organization and later that year, the tragedy of 9-11. That election and the year 2001 marked the end of American innocence. By the time President Bush stumbled into the Iraq war, we were wearing the masks of our own folly.

Now Russia’s Putin smiles wryly as he watches the Americans behaving like Russians. When accused of something, point to someone else and say, “What about them?” Every week comes another revelation of secret visits to Ukraine by someone on the Trump squad. Devin Nunes, the ranking member on the House Intelligence Committee, has just been fingered by Lev Parnas, one of Mayor Giuliani’s indicted Ukrainian fixers. In a crowd of crooks, who knows what the truth is? Putin sees the arrogant Americans pointing fingers at each other and smiles.

Let’s move on to other news. County by county surveys reveal that half of single person senior households have trouble meeting basic expenses each month (Elder Index, 2019). Ouch. A quarter of two-person senior households have the same problem. I was even more surprised to learn that seniors can now live less expensively in Los Angeles than in Denver. Whether renting or having no mortgage payment, costs were higher in Denver. Another ouch. Denver has California-itis. Interested readers can check the web site in the notes below and compare counties of their choosing.

There’s got to be some good news in this week’s blog! Sales of existing homes climbed 4.6% in October. Hooray. On the other hand, less than a third of those sales were to first time buyers, who are getting left out of the market.

Ok. I’ll stop. Next week, I promise I’ll have some cheerier news.

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Notes:

Elder Index. (2019). The Elder Index™ [Public Dataset]. Boston, MA: Gerontology Institute, University of Massachusetts Boston. Retrieved from ElderIndex.org

Haddad, T. (2019, November 23). After Giuliani ‘Fixer’ Alleges Nunes Met with Ukrainian Officials to Seek Biden Dirt, Congressman Threatens to Sue Media. Newsweek. [Web page]. Retrieved from https://www.newsweek.com/parnas-lawyers-nunes-ukraine-officials-meeting-lawsuit-1473679

NPR. (2019, November 22). Book Reviews: In ‘Crime In Progress,’ Fusion GPS Chiefs Tell The Inside Story Of The Steele Dossier. [Web page]. Retrieved from https://www.npr.org/2019/11/22/781589327/bosses-of-fusion-gps-tell-the-inside-story-of-the-steele-dossier

Oyez. (n.d.). Bush v. Gore. [Web page]. Retrieved from https://www.oyez.org/cases/2000/00-949

Photo by Steve Stofka

Wikipedia. (n.d.). Whataboutism. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Whataboutism#Soviet_and_Russian_leaders_usage

The Tweet Heard Round the World

November 17, 2019

by Steve Stofka

Those who voted for Mr. Trump in 2016 were drawn to his plain-spoken if gruff manner. Some older voters might have been reminded of another New Yorker with the same characteristics: Archie Bunker, of the 1970s TV series All in the Family. During the financial crisis, politicians handled the financial elite with kid gloves while ten million families lost their home to foreclosure (Picchi, 2018). Despite candidate Barack Obama’s 2008 promise to treat homeowners fairly, most of those foreclosures happened on his watch (Qiu, 2017). Tired of mealy-mouthed rhetoric from politicians of either political party, almost half of voters in 2016 pulled the lever for a candidate with no political experience.

This past Friday, former Ukraine ambassador Marie Yovanovitch testified before a House Select Committee on Intelligence. Ms. Yovanovitch is a highly decorated officer with the foreign service, and for several decades has served both Republican and Democratic presidents. Shortly after her opening statement on Friday morning, President Trump tweeted an attack on Ms. Yovanovitch, linking her service in dangerous regions like Mogadishu with the unrest in those countries (Shear, 2019).

Mr. Trump’s spiteful tweet reminds us of someone who rode a wave of worry in post-WW2 America. In 1953-54, Senator Joseph McCarthy hunted down communists in the U.S. and found them everywhere, including the U.S. Army. Thousands of American citizens ran afoul of Mr. McCarthy’s self-aggrandizing campaign and suffered the permanent loss of their careers. This included several high-profile actors, writers and directors in Hollywood.

Mr. McCarthy, a heavy drinker, was noted for his lack of decorum at the committee hearings he chaired. Fed up with the personal attacks and insults at a hearing, the Army’s lawyer, Joseph Welch, asked Mr. McCarthy, “Sir, have you no decency?” (U.S. Senate, n.d.). The question resounded with the American public who soured on McCarthy and the hearings. He quickly lost power and the witch hunt was over.

Mr. Trump attempts to vindicate himself against criticisms that he was the chosen candidate of Russian leader Vladimir Putin. As Republicans in Congress gather around to defend the president, they are ignoring the fact that the 2016 Russian disinformation campaign was launched against fellow Republican candidates before it was turned on Democratic candidate Hillary Clinton.

The comments by members of either party surrounding this week’s proceedings are characterized by a low signal-to-noise ratio. Each side tries to frame the debate, the process and the facts in evidence. The contradictions in speech and behavior thrive like weeds in a sunny field. When House Republicans launched impeachment proceedings against President Clinton twenty years ago, Democrats protested procedures and cried foul. These are experienced politicians with access to the same playbook.

Despite assertions to the contrary, the Constitution specifies no rules of impeachment. In 1998, the Congressional Research Service (CRS) prepared a history of previous impeachments for the U.S. Senate. What is an impeachable offense?

Each of the thirteen American impeachments involved charges of misconduct incompatible with the official position of the officeholder. This conduct falls into three broad categories; (1) exceeding the constitutional bounds of the powers of the office in derogation of the powers of another branch of government; (2) behaving in a manner grossly incompatible with the proper function and purpose of the office; and (3) employing the power of the office for an improper purpose or for personal gain.

(CRS, 1998)

 13 impeachments? Presidents are not the only federal officers subject to impeachment. Our political system is an organized street fight. There are rules of engagement that both sides have agreed on and each presidential impeachment has been prompted by a breach of those rules.

In 1868, President Andrew Johnson was impeached for the termination of a cabinet member without approval by Congress (CRS, 14). A Democratic House impeached Mr. Nixon because he obstructed a Congressional investigation into illegal campaign activities during the 1972 election (CRS, 15). Mr. Clinton was impeached for lying to Congress about his dalliance with a White House aide, Monica Lewinsky. Mr. Trump has been accused of parlaying foreign aid to Ukraine to gain an electoral advantage in the coming election.

No president has been convicted of the charges of impeachment brought against them. The Republican led Senate seems little inclined to break that tradition in President Trump’s case. In 1974 the public impeachment hearings of Mr. Nixon helped the Democratic House turn public opinion in their favor. Responding to public pressure, Republican Senators advised Mr. Nixon that they could not guarantee his safety against a vote of conviction. Mr. Nixon resigned rather than face the ignominy of a conviction in the Senate.

Democrats are hoping for a similar shift of opinion against Mr. Trump. While there is only a slight chance of conviction, Democrats hope that the impeachment hearings will convince a decisive number of voters that Mr. Trump does not deserve a second term in office. If he is to be convicted, it will be at the ballot box next November.

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Picchi, A. (2018, September 14). 5 groups still recovering from the financial crisis. [Web page, video]. Retrieved from https://www.cbsnews.com/news/5-groups-still-recovering-from-the-financial-crisis/

Qiu, L. (2017, January 5). Barack Obama’s top 25 campaign promises: How’d he do? [Web page]. Retrieved from https://www.politifact.com/truth-o-meter/article/2017/jan/05/tracking-obamas-top-25-campaign-promises/

Photo by Wim van ‘t Einde on Unsplash

Shear, M. (2019, November 16). With a Tweet, Trump Upends Republican Strategy for Dealing With Yovanovitch. New York Times. [Web page]. Retrieved from https://www.nytimes.com/2019/11/15/us/politics/trump-tweet-yovanovitch.html

U.S. Senate. (n.d.). Have You No Sense of Decency? [Web page]. Retrieved from https://www.senate.gov/artandhistory/history/minute/Have_you_no_sense_of_decency.htm

Congressional Research Service (CRS). (1998, October 29). Impeachment Grounds: A Collection of Selected Materials. [PDF]. Retrieved from https://www.senate.gov/CRSpubs/dfe6ac8e-78ad-4e59-bcda-d612c382ec2f.pdf Pgs. 14, 15, 26.

The Start of the Beginning

April 7, 2019

by Steve Stofka

In 1971 former President Nixon announced that the U.S. was abandoning the gold standard of fixed exchange that had existed for almost thirty years. Within a short time, other leading nations followed suit. Each nation’s currency simply traded against each other on a global currency, or FX, market.

Since oil was priced in dollars and the world ran on oil, the U.S. dollar became the world’s reserve currency. Each second of every day, millions of US dollars are traded on the international FX markets. The demand for US dollars is strong because we are a productive economy. The euro, yen and British pound are secondary currency benchmarks.

When the U.S. wants to borrow money from the rest of the world, the U.S. Treasury sells notes and bills collectively called “Treasuries” to large domestic and foreign banks who “park” them in their savings accounts at the Federal Reserve (Fed), the U.S. central bank (Note #1). The phrase “printing money” refers to a process where the Federal Reserve, an independent branch of the Federal Government, buys Treasury debt on the secondary market. It may surprise many to learn that the Fed owns the same percentage of U.S. debt as it did in 1980. The debt in real dollars has grown seven times, but the percentage held by the Fed is the same. That is a powerful testament to the global hunger for U.S. debt. Here’s the chart from the Fed’s FRED database.

FedResHoldTreasPctDebt

In 1835, President Andrew Jackson paid off the Federal debt, the one and only time the debt has been erased. It left the country’s banking system in such a weak state that subsequent events caused a panic and recession that lasted for almost a decade (Note #2). Government debt is the private economy’s asset. Paying down that debt reduces those assets.

About a third of the debt of the U.S. is traded around the world like gold. It is better than gold because it pays interest and there are no storage costs. Foreign businesses who borrow in dollars must be careful, however. They suffer when their local currency depreciates against the dollar. They must earn even greater profits to convert their local currency to dollars to make payments on those dollar-denominated loans.

Each auction of Treasury debt is oversubscribed. There isn’t enough debt to meet demand. In a world of uncertainty, the U.S. government has a long history of respect for its monetary obligations. As the reserve currency of the world, the U.S. government can spend at will. Even if there were no longer a line of domestic and foreign buyers for Treasuries, the Federal Reserve could “purchase” the Treasuries, i.e. print money. Let’s look at the difference between borrowing from the private sector and printing money.

When the private sector buys Treasuries, it is effectively trading in old capital that cannot be put to more productive use. That old capital represents the exchange of real goods at some time in the past. In contrast, when the government spends by buying its own debt, i.e. printing money, it is using up the current production of the private sector. This puts upward pressure on prices. Let’s look at a recent example.

Quantitative Easing (QE) was a Fed euphemism for printing money. During the three phases of QE that began in 2009, the Fed bought Treasury debt. That was an inflationary policy that countered price deflation as a result of the Financial Crisis. In August 2009, inflation sank as low as -.8% (Note #3). It was even worse, but inflation measures do not include the dividend yield on money. To many households, inflation felt like -2% (Note #4). The Fed’s first round of QE did provide a jolt that helped drive prices up by 3% and out of the deflationary zone.

During the five years of QE programs, the Fed continued to fight itself. The QE programs pushed prices upwards. Near zero interest rates produced a deflationary counterbalance to the inflationary pressures of printing money. Because inflation measures do not include the yield on money, the Fed could not read the true change in the prices of real goods in the private sector. The economy continues to fall below the Fed’s goal of 2% inflation. There are still too many idle resources.

Leading proponents of Modern Monetary Theory (MMT) remind people that yes, the U.S. can spend at will, but that it must base its borrowing on policy rules to avoid inflation. A key component of MMT is a Job Guarantee (JG) program ensuring employment to anyone who wants a job. A JG program may remind some of the WPA work programs during the Great Depression. Visitors to popular tourist attractions, from Yellowstone Park in Wyoming to Carlsbad Caverns in New Mexico, use facilities built by WPA work crews. Today’s JG program would be quite different. It would be locally administered and targeted toward smaller public works so that the program was flexible.

The U.S. government has borrowed freely to go to war and has never paid that debt back. Proponents of MMT recommend that the U.S. do the same during those times when the private economy cannot support full employment. That policy goal was given to the Fed in the 1970s, but it has never been able to meet the task of full employment through crude monetary tools. With an active program of full employment, the Fed would be left with only one goal – guarding against inflation.

There are two approaches to inflation control: monetary and fiscal. Monetary policy is controlled by the Fed and includes the setting of interest rates. If the Fed’s mandate was reduced to fighting inflation, it could more readily adopt the Taylor rule to set interest rates (Note #4).

Fiscal policy is controlled by Congress. Because taxation drains spending power from the economy, it has a powerful control on inflation. However, changes in tax policy are difficult to implement because taxes arouse passions. We are familiar with the arguments because they are repeated so often. Everyone should pay their “fair share,” whatever that is. Some want a flat tax like a head tax that cities like Denver have enacted. Others want a flat tax rate like some states tax incomes. Others want even more progressive income taxes so that the rich pay more and the middle class pay less. Some claim that income taxes are a government invasion of private property rights.

Because tax changes are difficult to enact, Congress would be slow to respond to changes in inflation. The Fed’s control of interest rates is the more responsive instrument. The JG program would provide stability to the economy and reduce the need for corrective monetary action by the Fed. The program would help uplift those in marginal communities and provide much needed assistance to cities and towns which had to delay public works projects and infrastructure repair because of the Financial Crisis. As sidewalks and streets get fixed and graffiti cleaned, those who live in those areas will take more pride in their town, in their communities, in their families and themselves. This makes not just good economic sense but good spiritual sense. We can start small, but we must start.

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Notes:

1. Twenty to twenty-five times each month, the Treasury auctions U.S. government debt. Many refer to the various forms of bills and notes as “treasuries.” A page on the debt
2. The Panic of 1837
3. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditure Index, PCEPI series.
4. The annual change in the 10-Year Constant Maturity Treasury fell below -1% at the start of the recession in December 2007 and remained below -1% until July 2009. FRED series DGS10. John Maynard Keynes had recommended the inclusion of money’s yield in any index of consumer demand. In his seminal work Foundations of Economic Analysis (1947), economist Paul Samuelson discussed the issue but discarded it (p. 164-5). Later economists did the same.
5. The Taylor rule utility at the Atlanta Federal Reserve.

 

The Nature of Money

March 31, 2019

by Steve Stofka

Modern Monetary Theory (MMT) helps us understand the funding flows between a sovereign government and a nation’s economy. I’ve included some resources in the notes below (Note #1). This analysis focuses on the private sector to help readers put the federal debt in perspective. In short, some annual deficits are to be expected as the cost of running a nation.

What is money? It is a collection of  government IOUs that represent the exchange of real assets, either now or in the past. Wealth is either real assets or the accumulation of IOUs, i.e. the past exchanges of real assets. When a sovereign government – I’ll call it SovGov, the ‘o’ pronounced like the ‘o’ in love – borrows from the private sector, it entices the holders of IOUs to give up their wealth in exchange for an annuity, i.e. a portion of their wealth returned to them with a small amount of interest. A loan is the temporal transfer of real assets from the past to the present and future. This is one way that SovGovs reabsorb IOUs out of the private economy. In effect, they distribute the historical exchange of real assets into the present.

What is a government purchase? When a SovGov buys a widget from the ABC company, it also borrows wealth, a real asset that was produced in the past, even if that good was produced only yesterday. The SovGov never pays back the loan. It issues money, an IOU, to the ABC company who then uses that IOU to pay employees and buy other goods. A SovGov pays back its IOUs with more IOUs. That is an important point. In capitalist economies, a SovGov exchanges real goods for an IOU only when the government acts like a private party, i.e. an entrance fee to a national park. Real goods are produced by the private economy and loaned to the SovGov.

What is inflation? When an economy does not produce enough real goods to match the money it loans to the SovGov, inflation results. Imagine an economy that builds ten chairs, a representation of real goods. If a SovGov pays for ten people to sit in those ten chairs, the economy stays in equilibrium. When a SovGov pays for eleven people to sit in those ten chairs, and the economy does not have enough unemployed carpenters or wood to build an eleventh chair, then a game of musical chairs begins. In the competition for chairs, the IOUs that the private economy holds lose value. Inflation is a game of musical chairs, i.e. too much money competing for too few real resources.

A key component of MMT framework is a Job Guarantee program, ensuring that there are not eleven people competing for ten jobs (Note #2). Labor is a real resource. When the private economy cannot provide full employment, the SovGov offers a job to anyone wanting one. By fully utilizing labor capacity, the SovGov keeps inflation in check. The  idea that the government should fill any employment slack was developed and promoted by economist John Maynard Keynes in his 1936 book The General Theory of Employment, Money and Interest.

The first way a SovGov vacuums up past IOUs is by borrowing, i.e. issuing new IOUs. I discussed this earlier. A SovGov also reduces the number of IOUs outstanding through taxation, by which the private sector returns most of those IOUs to the SovGov.

Let’s compare these two methods of reducing IOUs. In Chapter 3 of The Wealth of Nations, Adam Smith wrote that government borrowing “destroys more old capital … and hinders less the accumulation or acquisition of new capital” (Note #3). Borrowing draws from the pool of past IOUs; taxation draws more from the current year’s stock of IOUs. Further, Smith noted that there is a social welfare component to government borrowing. By drawing from stocks of old capital it allows current producers to repair the inequalities and waste that allowed those holders of old capital to accumulate wealth. He wrote, “Under the system of funding [government borrowing], the frugality and industry of private people can more easily repair the breaches which the waste and extravagance of government may occasionally make in the general capital of the society.”

Borrowing draws IOUs from past production, while taxation vacuums up IOUs from current production. Since World War 2, the private sector has returned almost $96 in taxes for every $100 of federal IOUs. Since January 1947, the private sector has loaned the federal government $371 trillion dollars of real goods, the total of federal expenditures (Note #4). What does the federal government still owe out of that $371 trillion? $15.5 trillion, or 4.17% (Note #5). If the private sector were indeed a commercial bank, it would expect operating expenses of 3%, or $11.1 trillion (Note #6). What real assets does the private sector have for the difference of $4.4 trillion in the past 70 years? A national highway system and the best equipped military in the world are just two prominent assets.

The federal government spends about 17-20% of GDP, far lower than the average of OECD countries (Note #7). That is important because the accumulated Federal debt of $15.5 trillion is only .9% of the $1.7 quadrillion of GDP produced by the private sector since January 1947. Our grandchildren have not inherited a crushing debt, as some have called it. In the next forty years, the U.S. economy will produce about $2 quadrillion of GDP (Note #8). If tomorrow’s generations are as frugal as past generations, they will generate another $18 trillion of debt.

Adam Smith called a nation’s debt “unemployed capital,” a more apt term. The obligation of a productive nation is to put unemployed capital to work for the community. Under the current international system of national accounting, there is no way to account for the accumulated net value of real assets, or the communal operating expenses of the private economy. Without a proper accounting of those items, we engage in noisy arguments about the size of the debt.

In next week’s blog, I’ll examine the inflation pressures of government debt. I’ll review the Federal Reserve’s QE programs and why it has struggled to hit its target inflation rate of 2%. We’ll revisit a proposal by John Maynard Keynes that was discarded by later economists.

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Notes:
1. A video presentation of SovGov funding by Stephanie Kelton . For more in depth reading,  I suggest Modern Monetary Theory by L. Randall Wray, and Macroeconomics by William Mitchell, L. Randall Wray and Martin Watts.

2. L. Randall Wray wrote a short 7 page paper on the Job Guarantee program . A more comprehensive 56-page proposal can be found here 

3. Adam Smith’s The Wealth of Nations was published in 1776, the year that the U.S. declared independence from Britain. Smith invented the field of economics. The book runs 900 pages and is available on Kindle for $.99

4. Federal Expenditures FGEXPND series at FRED.

5. At the end of 1946, the Gross Federal Debt held by the public was $242 billion (FYGFDPUB series at FRED). Today, that debt total is $15,750 billion, or almost $16 trillion dollars. The difference is $15.5 trillion. The debt held by the public does not include debt that the Federal government owes itself for the Social Security and Medicare “funds.” Under these PayGo pension systems, those funds are nothing more than internal accounting entries.

6. In 2017, the Federal Reserve estimated interest and non-interest expenses for all commercial banks at 3% (Table 2, Column 3).

7. Germany’s government, the leading country in the European Union, spends 44% of its GDP Source

8. Assuming GDP growth averages 2.5% during the next forty years.

9. International Accounting Standards Board (IASB) sets standards for public sector accounting.

 

The Green Divide

March 24, 2019

by Steve Stofka

Half of the country’s voters live on 80% of the land, which the political analysts color red. Half of voters live on the remaining 20% of land, which is colored blue. The needs, values and outlooks of those in the red are not the same as those in the blue. As the country’s population continues to migrate from rural to metropolitan areas, the country becomes ever more divided. As economist Paul Krugman wrote this week, no one knows how to fix the continuing economic decline in rural areas (Note #1).

A person’s views on an issue may depend on the state they live in. In the past several decades, immigration has had much more impact on California and the southern states. In 1980, 15% of California’s population was foreign born, almost four times the national average of 4.3%. In 2015, that share had doubled for both California and the nation as a whole. However, the national average is only a third of California’s numbers (Note #2). How does the nation adopt a single policy toward immigration when there are such differences in circumstances?

Regardless of our different experiences and outlooks, we are dependent on each other. 20% of Americans are on the Social Security and Medicare programs (Note #3). 24% are on CHIP and Medicaid (Note #4). 40% of the two million farms in America receive subsidies (Note #5). The transfers of money between Americans has reached 14% of GDP.

TransfersPctGDP

In 1962, Ronald Reagan took a stridently conservative tone when he warned that the Medicare program being developed in the Democratic Congress would lead to socialism and the destruction of American democracy (Note #6). Having married into wealth, he could afford a dramatic interpretation of social policy. Few Americans hold such extreme views today (Note #7).

The reasonable arguments of today might look oppressive to future generations, and progressive ideas seem natural to our descendants. Our ancestors had different views toward slavery, racism, voting rights and social programs than we have today. What has not changed is our distrust of those we regard as “other,” and our desire to make our principles universal for our fellow Americans. We want everyone to play by our rules, or our interpretation of the rules.

In the debates on the ratification of the US Constitution, some asked what the terms “provide for the …general welfare” meant (Note #8). Was the new government to become a national charity? The Federalists argued for the inclusion of the term to give the government a degree of latitude in changing circumstances. The anti-Federalists argued that this new government would eventually become the home of beggars and lobbyists wanting to promote their own welfare as the “general welfare.” In the past century, the phrase has become a constitutional bedrock of Supreme Court precedent underlying social programs. A person could argue that the size of social welfare spending and the extraordinary power of lobbyists in Washington has proven the anti-Federalist’s case.

America is the land of debate because the Constitution was structured to promote debate. While Americans had a platform to argue with each other, it was hoped that there would be less bloodshed, rebellion, and dictatorship (Note #9). Some days we might be less sure of that premise. As the circumstances of urban and rural America diverge further, we will struggle ever more to reach consensus. Each side will feel the need to impose its will on the other.  As we debate these issues, we should be just as careful of our own instincts as we are about the instincts of those on the other side of the debate.

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Notes:

1. Krugman op-ed on lack of solutions for the economic decline in rural America
2. Four decades of immigration numbers – pdf page 6
3. 62 million Americans on Social Security and Medicare – numbers here
4. 74 million Americans on CHIP and Medicaid – numbers here
5. 39% of 2.1 million farms receive agricultural subsidies
6. Reagan warns against Medicare
7. During the debate before the passage of Obamacare, some Tea Party members advocated a return to the days when we just let old people die.
8. U.S. Constitution, Section 8.1 “provide for the common Defence [sic] and general Welfare of the United States” http://constitutionus.com/
9. Former colonies of Great Britain have struggled with free speech issues. South Africans has only had freedom of expression for twenty years . Canada still does not have complete freedom of speech