America Thirsts

Leave a comment

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.

////////////////

Notes:

Photo by Aaron Burden on Unsplash

Dirty Laundry

Leave a comment

October 11, 2020

By Steve Stofka

On Friday, the New York Times released more of Donald Trump‘s tax records (Craig, Mcintire & Buettner, 2020). They reveal a money laundering scheme that Mr. Trump used to fund his 2016 campaign. In the closing months of the campaign, few Republican donors wanted to bankroll his bid for the Presidency, and he was short of funds.

The train to Vegas. In the aftermath of the 2008 financial crisis, Democratic Senate Leader Harry Reid tried to put together a project for a commuter train from California to Las Vegas. When the entire project was done, residents of the L.A. area would be able to take a train to Las Vegas instead of making the arduous drive via the I-10 and I-15 freeways. Anyone who has driven this route on a Friday can swear that it evokes Chris Rea’s song The Road to Hell.

By the time the project funding was put together five years later, Republicans controlled the House and several of their leaders rejected the idea. One was Jeff Sessions, the ranking member of the Senate Budget Committee and later Mr. Trump’s Attorney General; the other was Paul Ryan, the head of the House Budget Committee. They insisted that the project be built using American products; it couldn’t be done. Germany, Japan and China have become the global leaders in train manufacturing.  

Vegas real estate tycoons, including Mr. Trump and his Vegas partner Phil Ruffin, would have benefitted greatly from the train traffic. The likelihood of such a project would be revitalized if Mr. Trump were President. Out came the checkbooks and the big Republican “whales” from Vegas, including Sheldon Adelson and Steve Wynn, contributed to the Trump campaign. His partner, Phil Ruffin, routed money through a shell company to Mr. Trump who used it to fund his campaign.

Although a court would have to decide, some of the campaign contributions were probably illegal. If Mr. Trump is elected again this year, he will shield himself from any prosecution and he would probably help protect others from adverse legal proceedings.

On Saturday, the newspaper was releasing still more evidence that Mr. Trump has used the Presidency to rescue his failing company from a heavy debt load. His hotels were already struggling before the Covid virus swept the world this year. Each new revelation indicates that Mr. Trump has built a house of cards like the Ponzi scheme built by Bernie Madoff, the former head of NASDAQ.

If Mr. Trump loses the election, he will face a legal and financial reckoning that he has delayed for the four years of his Presidency. His erratic and belligerent behavior may be partly in desperation. His former attorney, Michael Cohen, commented that if Mr. Trump were still his client, he would recommend that Mr. Trump resign the Presidency before his term is out, then arrange for Mr. Pence, his Vice-President, to issue him a pardon for any pending Federal crimes.

Mr. Trump is the first presidential candidate to “self-fund” his campaign and be successful. Surely, lawmakers on both sides of the aisle have learned a lesson. Are we a better country if a person can buy the Presidency? I think not.

///////////

Notes:

Photo by Sahand Hoseini on Unsplash

Craig, S., Mcintire, M., & Buettner, R. (2020, October 09). Trump’s Taxes Show He Engineered a Sudden Windfall in 2016. Retrieved October 11, 2020, from https://www.nytimes.com/interactive/2020/10/09/us/donald-trump-taxes-las-vegas.html

An Explosion of Events

1 Comment

October 4, 2020

by Steve Stofka

This has been a week of surprises. Sunday night, the NY Times released the details of President Trump’s tax documents which he has sought to keep hidden under the pretense that an IRS audit prevents him from doing so. We learned that Mr. Trump’s wealth is a ruse, like that of Bernie Madoff. We discovered the reason for the IRS audit: a $72 million refund that Mr. Trump was paid in 2009 under a dubious interpretation of rules in the Recovery Act following the 2008 financial crisis.

The report contains many instances of rule bending if not outright fraud. It serves as an example of why Republicans have repeatedly cut funding for the IRS. With fewer people, the IRS is unable to monitor the shenanigans of Mr. Trump and his accountants.

The last two decades have seen the largest accounting scandals, and most of them happened while Republicans controlled the majority if not all of the federal government. Enron, Tyco and Health South in the early 2000s were just the prelude to the 2008 financial crisis. The Enron scandal exposed the misdeeds of one of the largest accounting firms in the world, Arthur Anderson, who was forced to surrender their license in 2002. During these past twenty years, Republicans have consistently fought to undermine the mission of all government monitoring, to bend the rules in favor of large industry. Mr. Trump called us working stiffs suckers for paying taxes.

On Tuesday’s debate between both Presidential candidates, Mr. Trump’s interruptions broke debate protocol and the rules he had agreed to. That’s not a surprise. He is a notorious cheater at golf and has a motor mouth. He is an entertainer, not a statesman or a gentleman. The surprise was that Mr. Biden met the verbal assault without fluster. Afflicted with stuttering since he was a child, Mr. Biden has learned to speak with deliberation, a common strategy taught to stutterers. Kids around the country, watch Mr. Biden. This is how you stand up to bullies.

The announcement late Thursday night that Mr. Trump had tested positive for Covid surprised those of us who wondered how the disease had not caught up to the President, who has played the tough guy and pooh-poohed caution. Mr. Trump has several comorbidities, his physician said, without being specific. A lack of prudence might be one of them. Several hours later, Mr. Trump was taken to Walter Reed hospital out of “an abundance of caution.” With a month left before the election, Mr. Trump had a busy election schedule, which is up in the air for the next two weeks, at least. More on that at the end of this post.

The surprise in Friday’s monthly hiring report was the weak job recovery. The employment population ratio is 56.6%, significantly down from 61% in February, before Covid. In February, 1.5 people working supported each person not working, including children. Now it is 1.3 people supporting each person not working.

The growing debt of the Federal government has relieved some of the burden on workers, because, in times of crisis, the rest of the world wants to buy U.S. Treasuries. State and local governments are squeezed. Governments laid off 216,000 workers in September. Who will they turn to except the Federal government? Senate Republican Leader Mitch McConnell balks at aid to the states, particularly the “blue” states.

In the past weeks, airlines and other industries have been announcing permanent layoffs. Older people may be taking early retirement. The four industries that have not suffered during this crisis are utilities, consumer staples, technology and health care. The effect of tech on the stock market has been dramatic. The SP500, weighted by market cap, is up 7% since January. An evenly weighted SP500 index is down 17%. That reflects a general economic misery.  

The week was still not done. On Saturday, we learned that the President had known earlier that he had Covid. He met with prominent Republicans and did not tell them he had the disease. Former NJ governor and campaign advisor Chris Christie has now tested positive for the disease. Mr. Christie is younger but is obese, the chief co-morbidity leading to death. Kellyanne Conway, Mr. Trump’s White House advisor, has also tested positive. The White House is doing a trace of all people who came into contact with Mr. Trump. He hates his enemies, but he doesn’t spare his friends either.

//////////////

Photo by Jens Johnsson on Unsplash

Equal Rights

Leave a comment

September 27, 2020

by Steve Stofka

Justice Ginsburg’s passing helps us focus on a principle that she fought for during her long career – equal rights. The right to life and liberty are stated plainly in the Declaration of Independence but they were not inserted in the Constitution. The Declaration is a statement of intent; the Constitution is the binding law of the land. Why were the words left out?

Within societies there is some person or governing body that confers property rights. Those rights can be temporary – the access to the Nile River granted by the Pharaoh. They can be permanent – the grant of an entire country by a Spanish king. Property rights are a foundational issue in our daily lives.

Our country was founded on the principle that some human beings were property and one human being could be granted the property right to another human being. Our Civil War was fought after the Supreme Court affirmed the property rights of slave holders in the Federal territories recently won in the war with Mexico. This was the court’s infamous 1857 Dred Scott decision.

A governing body that grants property rights can take them away. Indian tribes learned that treaties are not contracts in white man law. For most of the 19th century, treaties were convenient shams – pretenses of principle. Whenever white people wanted gold, silver or grazing land, a treaty was “negotiable.”

Doesn’t the 5th Amendment give us a right to life and liberty? It states that no one should be “deprived of life, liberty or property without due process of law.” The 14th Amendment, Section 1 repeats that language, but it doesn’t grant any of us a right to those things. It says that if granted a right to those, the government should not take them away without a formal process. The Amendment permits the government to make laws that deprive us of rights.

Compare the language of the 5th Amendment with that of the 1st Amendment, which doesn’t allow the state to make any law abridging free speech.

In the 1972 Roe v. Wade case, the Supreme Court acknowledged that the state of Texas had an “interest” in protecting the “potentiality of human life,” but that a woman had a “right to privacy” inherent in the 14th Amendment (Oyez, n.d.). Justice Ginsburg faulted the court for its weak rationale. The all male Supreme could not reason that women have an equal protection under the law. No state interferes in the private relationship between a doctor and a male patient; therefore, they cannot do it with female patients. That autonomy is a “privilege” which no state may abridge, according to Section 1 of the 14th Amendment. Because of its flawed privacy rationale, a minority of people, mostly Christian groups, have chipped away at the decision.

Why did our country’s founders not specifically recognize a person’s property right to their own body? First, that would have negated the rights of slaveholders. Secondly, the state needs to take control of the bodies of men during times of war. To rephrase General Patton, it needs puppets it can throw into the cannon fire.

Just as men are fighting machines for the state in times of war, women are breeding machines for the state during their fertile years. In the 18th century when the Constitution was written, that was the case. It was assumed that more people maintained the vitality of society and the state. Ten years after the Constitution was written, economist Thomas Malthus’ raised a question that shocked Britain and caused many to shun him. What if more people were bad for society, and destabilizing to the state?

The diminutive Justice Ginsburg broke many doors slammed in her face by the legal profession. Throughout her career, she fought for the most fundamental right that any person can have – to stand equally under the law, be they man or woman. A tempered character, she was not one who rests in peace. She was a determined fighter who will rest only when this country finally acknowledges that most basic right of any human being.

/////////////////

Photo by Tingey Injury Law Firm on Unsplash

Oyez. (n.d.). Roe v. Wade. Retrieved September 25, 2020, from https://www.oyez.org/cases/1971/70-18

A Light Passes

Leave a comment

September 20, 2020

by Steve Stofka

Have we had enough yet? Almost 200,000 Americans have died from Covid, millions of Americans are out of jobs, hundreds of thousands of small family businesses have closed, millions of families are about to lose their homes, thousands of acres in western lands on fire, thousands more left homeless by Hurricane Sally and now Justice Ruth Bader Ginsburg has died. The nation wishes her two children and four grandchildren their condolences for her passing. At least half of the nation grieves for the political battle that is to come.

The day before Justice Ginsburg died, the National Constitution Center awarded her the 2020 Liberty Medal. Jeffrey Rosen, the host, spoke with two lawyers who have argued cases before the court and clerked for RBG. https://constitutioncenter.org/debate/podcasts

She was a pioneer in legal justice for human beings, regardless of the roles that society assigned them based on their sex. She helped to steer the Supreme Court to prejudicial practices against women by first encouraging her male colleagues to review practices that put men at a disadvantage.

She often wrote the opinion for the liberal justices on the court but had the respect of one of the court’s most conservative justices, the late Justice Antonin Scalia. Her reasoning was sound; her principles were consistent; her loyalty to fair treatment under the law steered her through many an argument to a clear conclusion.

I have no doubt that the conservative Federalist Society already has a waiting list of Supreme Court replacements for Senate Majority Leader Mitch McConnell and President Trump to consider. Will they delay this appointment in the hopes that it will bring out more Republican voters? If Trump loses the election, McConnell can bring the appointment of a new Justice before the Senate in December or January. If Republicans lose the majority in the Senate, he will have to make the appointment in December because the new Senators take their seats on January 3rd, 2021.

As I write this on Friday night, McConnell has just announced that he will seek a quick nomination. The gloves are off. It’s about to get bloody. In further updates, Republican Senators Susan Collins and Mitt Romney have said that they don’t think a nomination is appropriate just before an election. Whether McConnell has enough votes to proceed with the nomination, some Republican Senators may want the vote anyway to show their allegiance to Trump just before the election.

///////////////////////////

Photo by Juskteez Vu on Unsplash

The Urban Refugee Crisis

Leave a comment

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.

/////////////

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

Bridge the Gap?

Leave a comment

Photo by Ragnar Vorel on Unsplash

September 6, 2020

by Steve Stofka

What issues are your priorities this election? For more than thirty years Pew Research has surveyed people about their priorities. For the first time in 2019 a majority of 765 respondents answered that there is a “great deal” of difference in where each party stands, up from 25% in 1987 (Pew Research, 2020). I’ve included the full list at the end.

In January 2019, soon after the midterm elections Pew surveyed 1500 adults (Jones, 2020). I don’t know why the abortion/free choice debate is not on the issue list since that single issue may decide some voters. I’m particularly interested in the large gaps in those priorities among those who lean Democrat or Republican. I’ll start with gaps of 25%. For instance, terrorism is a concern for 80% of Republicans but only 55% of Democrats. Other Republican priorities are Immigration, the Military and Crime.

As you can see, these are fear issues. Should a person in a town of 2000 be more concerned about terrorism than a resident of NYC? Of course not, but it is what it is. People vote out of fear and hope, but fear probably wins the wrestling match, especially among Republican voters who are not hopey, changey voters, as former VP candidate Sarah Palin noted (Gonyea, 2010).

The issue of crime illustrates the conflicting complexities of these issues. It is a 60% priority for Republicans, who are in suburban and rural areas where there is less crime, and a 40% priority for Democrats, who are in dense urban areas where there is a higher incidence of crime. Because crime is much lower than in past decades, this issue has slipped as a priority for Democrats (FBI, n.d.).  

Two of the highest Democrat priorites – Cimate Change and the Environment – have a huge gap of 50% with Republican voters. Democrat politicians have not been able to make these two fear issues personal for Republicans. If they could, they would draw more voters to their side on this issue. 25% gaps exist on issues of the Poor and Needy, Health Care, Education and Race Relations. Rural Republican voters are more likely to be poor and needy, but this is not a fear issue for them (USDA, n.d.).

What strategy would a politician or political consultant advise? Run toward the base? If so, one would emphasize these issues where there are large gaps between the two primary factions in this country. The President has largely adopted this strategy. Republican voters are more inclined to fall in line and the President is relying on this party loyalty even if they don’t like him personally.

Some issues where there is a smaller gap between factions are the economy, the budget deficit, jobs, global trade, drug addiction, transportation, Social Security and Medicare.

A politician reaching out to voters on the fence in this election would focus on these issues. Joe Biden hits the jobs theme, the budget deficit, and protecting Social Security and Medicare to appeal to voters who have had their fill of the President’s divisiveness.

In the coming two months, candidates may adjust their strategies. In the 2016 election, Hillary Clinton may not have addressed these shared concerns as well and it cost her the election.  Governing comes after winning an election. In politics, winning is packaging the concerns and identities of voters into an appealing, if not attractive, box that will get them to come out and vote.

What are your priorities this election season? Are you a multi-issue voter, a single issue voter, a party voter regardless of the issues? Here’s the Pew survey list of 18 issues: terrorism, immigration, military, crime, climate change, environment, poor and needy, race relations, health care, education, economy, Social Security, Medicare, jobs, drug addiction, transportation, global trade, and the budget deficit.

///////////////

Notes:

FBI. (n.d.). Crime rates in the United States, 2008 – 2018. Retrieved September 05, 2020, from https://crime-data-explorer.fr.cloud.gov/explorer/national/united-states/crime

Gonyea, D. (2010, February 07). ‘How’s That Hopey, Changey Stuff?’ Palin Asks. Retrieved September 05, 2020, from https://www.npr.org/templates/story/story.php?storyId=123462728

Jones, B. (2020, August 26). Republicans and Democrats have grown further apart on what the nation’s top priorities should be. Retrieved September 05, 2020, from https://www.pewresearch.org/fact-tank/2019/02/05/republicans-and-democrats-have-grown-further-apart-on-what-the-nations-top-priorities-should-be/

Pew Research Center. (2020, August 21). Public’s 2019 Priorities: Economy, Health Care, Education and Security All Near Top of List. Retrieved September 05, 2020, from https://www.pewresearch.org/politics/2019/01/24/publics-2019-priorities-economy-health-care-education-and-security-all-near-top-of-list/

U.S.D.A. (n.d.). Rural Poverty & Well-Being. Retrieved September 05, 2020, from https://www.ers.usda.gov/topics/rural-economy-population/rural-poverty-well-being/

Thumbs Up?

Leave a comment

August 30, 2020

by Steve Stofka

I tuned into the Republican National Convention (RNC) for a short time and learned that everything is ok. 175,000 people dead from COVID – ok. Millions of people out of work – ok. Older folks losing their retirement savings and a lifetime of sweat equity as their businesses close – ok. Seniors unable to get their medications and prescriptions on time – ok. People lined up at food banks – ok. People sitting on their furniture after being evicted – OK.

Black men being shot down for non-compliance to police orders – ok. Peaceful and violent protests in cities around the country  – ok. Food left rotting in the fields – ok. Growers can’t get H-2B visas to hire foreign workers and Americans don’t want the jobs – ok. More suicides, especially by former military – ok. More domestic abuse – ok. More drug abuse – ok.

The White House – our house – used for political grandstanding- that’s ok. This week American soldiers in an MRAP in Syria sideswiped and injured by Russian soldiers – that’s ok. The president is pulling troops out. Deficits of many trillions of dollars – ok.

As long as the stock market is up, it’s all ok.

In Shakespearean tragedies a powerful man – always a man – is brought down by one fatal flaw of character. Circumstance exposes the flaw. Othello, Hamlet, Macbeth, Richard III, King Lear. English students are asked to identify the fatal flaw and explain their choice. Students are asked to privately imagine themselves in a position of power. What would be their fatal flaw?

Can a great nation have a fatal flaw? James Madison and Alexander Hamilton worried that democracy would lead to mob rule and bring down our country. Thomas Jefferson worried that regional interests would create a ruling aristocracy and a nation ruled by monarchy. I watched a few minutes of the White House pomp on Thursday night. Our president embodies both fears of our founders. 

//////////////////

Notes:

Photo by Max Muselmann on Unsplash

The Wrong Medicine

Leave a comment

August 23, 2020

by Steve Stofka

During this pandemic, the Federal Reserve has been supportive of the asset markets and the government’s stimulus and relief programs. It’s immediate response was to lower interest rates, a boon for home buyers. This week we learned that home sales had rebounded 25% in July and are up 7% over last year at this time. Low interest rates have benefited homebuyers but penalized savers and pension funds who must generate a current income flow from their savings base.

During the 1930s Depression, the economist John Maynard Keynes argued that, because people want to hoard during a downturn, a central bank should maintain an interest level sufficient to induce people to deposit their money in banks (Keynes, 1936). Government-insured savings accounts helped solve that confidence problem. Keynes’ language and sentence construction are laborious, leading some people to think that Keynes argued for a policy of ultra-low rates during economic declines. He did not. Low interest rates are not a Keynesian solution.

Despite the low rates, the amount of savings has doubled since the financial crisis in September 2008. There is a distinctive change in savings behavior at that important point.

With a savings base of $11 trillion, every 1% decrease in interest rates is a transfer of income of $110 billion from savers to borrowers. Who is the largest borrower? The government. Aren’t low interest rates good for businesses? No, Keynes argued rather unartfully in Chapter 15. Borrowing is a long-term decision, and subject to error. When interest rates are particularly low, like 2%, there is no wiggle room for error in the expectations of businesses who might borrow. For homebuyers, expectations of future business conditions are a small factor.

During an economic decline, people and businesses are guided more by short-term decisions. When interest rates are low like today, banks don’t want to lend because they aren’t confident in the flow of deposits to maintain their liquidity. Banks need that flow of deposits to meet the outflow of money when they make loans (Coppola, 2017). Entrepreneurs are reluctant to borrow for expansion because they are not confident in the accuracy of their long-term expectations. They borrow to pay back more predictable future obligations, particularly current and future stock grants to their key employees. Borrowing money to fund stock grants does not create jobs but helps inflate stock prices.

Keynes badly underestimated the political forces that guide a central bank’s decision making. As it did a decade ago, the Federal Reserve has lowered interest rates to near-zero, the opposite of Keynes’ prescription. Low interest rates do not benefit bank stocks, which have declined by 25% and more. A select group of technology stocks are booming as people consume more digital services at work and play. Borrowing by businesses jumped in response to the CARES act but many businesses kept those borrowed funds liquid to avoid insolvency during this crisis. We can expect slow growth as consumers and businesses continue to make short-term decisions, and asset markets are warped by central bank policy.

//////////////

Notes:

Photo by Christina Victoria Craft on Unsplash

Coppola, F. (2017, November 01). Bank Capital And Liquidity: Sorting Out The Muddle. Forbes Magazine. Retrieved August 15, 2020, from https://www.forbes.com/sites/francescoppola/2017/10/31/bank-capital-and-liquidity-sorting-out-the-muddle/

Keynes, J. M. (1936). The general theory of employment interest and money (p. 124). New York, NY: Harcourt, Brace & World.

The Long and Short Run

Leave a comment

August 16, 2020

by Steve Stofka

Gold is at an all-time high. Like wheat and other commodities, it pays no interest. Gold’s price moves up or down based on expectations about the value of money used to buy gold. If inflation is expected to increase, the price of gold will go up. Eight years ago, after several rounds of quantitative easing by central banks, gold traders bet that inflation would rise. It didn’t, and the price of gold declined by a third.

Since mid-February, the U.S. central bank has pumped almost $3 trillion of liquidity into the economy (Federal Reserve, 2020). Numbers like that hardly seem real. Let’s look at it another way. The overnight interest rate is so low that it is essentially zero – like gold. People around the world regard U.S. money and Treasury debt as safe assets – like gold. Imagine that the central bank went to Fort Knox, loaded up 1.5 billion troy ounces of gold – about 103 million pounds – in gold coins and dropped them on everyone in the U.S. There are about 190,000 tonnes (2204 lbs./tonne) of gold in the world, a 70-year supply at current production. A helicopter drop of gold would be almost 47,000 tonnes, or 25% of the world supply. It would take five C-5 cargo planes to haul all that.

Milton Friedman was an economist who believed in the quantity theory of money. His model of money and inflation held “inflation is always and everywhere a monetary phenomenon.” If the growth of money was greater than the growth of the economy, inflation resulted. The data from the past decade has refuted this model. Former chairman of the Federal Reserve Ben Bernanke noted that the evidence suggests that economists do not fully understand the causes of inflation (C-Span, 2020, July). He was including himself in that group of economists because he had been an advocate of that model (Fiebiger & LaVoie, 2020).

What has the Federal Reserve and the government done to navigate the difficult path created by this pandemic? Helicopter Money for businesses and consumers. Lots of toilet tissue, so to speak. No reason to hoard, folks. There’s plenty. They have followed the first of John Maynard Keynes’ prescriptions for a downturn. The government should spend money. Why? It is the only economic actor that can make long-term decisions. Everyone else is focused on the short term.  Keynes badly mis-estimated the short-term thinking of politicians, particularly in an election year.

Will the flood of money cause inflation as gold bugs assert? Some point to the recent rise in food prices as evidence of inflationary forces. However, the July Consumer report indicates only a 1% annual rise in prices, half of the Fed’s 2% inflation target. The rise in food prices this spring was probably a temporary phenomenon. It suggests that the Fed is fighting deflation, as Ben Bernanke noted this past April (C-Span, 2020 April).

Since March, government spending has helped millions of American families stay afloat during this pandemic. Congress has gone home without extending unemployment relief and other programs. Many families are being used as election year hostages by both sides. House Democrats put their cards on the table three months ago. Republicans in the Senate and White House have dawdled and delayed. Faced with a chaotic consensus in his own coalition, Senate Majority Leader McConnell has largely abdicated control of the Senate to the White House and the wishy-washy whims of the President.

We return to where we began – gold. It is neither debt, equity nor land. As a commodity, only a small part is used each year. It has been used as a medium of exchange and a store of value. Except for a few years during and after the Civil War, gold held the same price from 1850 until the 1929 Depression – $20.67. In the long run, longer than a person’s retirement, gold is good store of value. In the ninety years since the Great Depression began, the price of gold has grown 100 times. Yet it is still lower than its price in 1980. The U.S. dollar does not hold its value over several decades, but it is predictable in the near-term. In a tumultuous world, predictability is valuable. The dollar has become the new gold.

//////////////////////

Photo by Lucas Benjamin on Unsplash

C-Span. (2020, April 7). Firefighting. Retrieved August 12, 2020, from https://www.c-span.org/video/?471049-1%2Ffirefighting (00:21:15).

C-Span. (2020, July 18). Ben Bernanke and Janet Yellen Testify on COVID-19 Economic Inequities. Retrieved August 12, 2020, from https://www.c-span.org/video/?473950-1%2Fben-bernanke-janet-yellen-testify-covid-19-economic-inequities (01:35:20)

Federal Reserve. (2020, July 29). Recent Balance Sheet Trends. Retrieved August 12, 2020, from https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Fiebiger, B., & LaVoie, M. (2020, March 4). Helicopter Ben, Monetarism, The New Keynesian Credit View and Loanable Funds. Retrieved August 12, 2020, from https://www.tandfonline.com/doi/abs/10.1080/00213624.2020.1720567?journalCode=mjei20