Tuesday, August 13, 2019

President Trump: the Fed's Biggest Moral Hazard

Perhaps the Federal Reserve's biggest problem today is that it has a moral hazard problem with President Trump.  A moral hazard is a situation in which a person can take risks without having to bear the full consequences of those risks.  For example, when stock market investors think the Federal Reserve will cut interest rates to prop up the economy and the stock market should things go downward, they are more willing to buy stocks because they expect a bailout from the Fed.  This can lead to over-investment in stocks and greater potential for an asset bubble that can later burst painfully.

President Trump's trade war with China has created uncertainty.  The economy is slowing and the stock market has been trending downward for several weeks.  Trump has been haranguing the Fed to cut interest rates, evidently in the belief that such cuts can offset the negative impact of his trade war.  There is considerable debate among economists and others whether the Fed can actually prop up the economy and stocks while the President exchanges volleys of tariffs and other trade restrictions with China.  Perhaps the Fed can soften the impact, but it seems doubtful the Fed can do more than slow down the negative impacts of the trade war.  When the Fed lowers rates in what is already a low-rate environment, that signals things are going to be bad.  Businesses pull back, slowing hiring and investment.  Consumers spend less..  The rate cuts could produce a self-fulfilling prophecy.

However, as long as President Trump believes the Fed can offset the damage his trade war does, he has no incentive to act prudently.  He may instead proceed recklessly and then turn to the Fed to put out the fires he starts.  This is an extremely concerning instance of moral hazard, and one for which there is no easy solution (because the President doesn't seem to understand economic reality).  The President could trigger an economic downturn and a bear market with no certainty that he could secure a good trade deal.  And we'd all pay the price.

Thursday, July 11, 2019

How to Stimulate the Economy

With current economic indicators mostly signaling a slowdown in the economy--and perhaps a recession--a lot of attention is focused on stimulating the economy. The dialogue revolves around central bank accommodation (via lowering interest rates and bond purchases in the form of quantitative easing) and fiscal policy (i.e., deficit spending).  Fiscal measures are essentially impossible because of political gridlock.  And central banks, having devoted the past decade to accommodation, have only limited ammo left.  So what can stave off recession and renew economic growth?

There's no simple answer.  But one important factor is the availability of inexpensive energy.  Modern life is dependent on vast amounts of cheap energy.  The Industrial Revolution that created our high tech lives was the result of the development of inexpensive ways to harness and utilize large amounts of energy.

Let's begin in A.D. 1700.  Living standards in A.D. 1700 worldwide were about the same as they were in A.D. 700 and 300 B.C.  In other words, things had hardly improved over thousands of years.  But within the 150 years following 1700, people had developed the steam engine and learned how to harness electricity for commercial use.  These developments were followed by new ways to extract large amounts of fossil fuels that could be sold inexpensively.  Then, after 200 years (i.e., by 1900), people had developed the internal combustion engine.  The internal combustion engine could be used widely in transportation, manufacturing and many other ways.  Large scale generation and distribution of electricity became feasible, and the widespread availability of electric motors greatly enhanced living standards.  Economic growth and improvement of living standards accelerated at an exponential pace.  In essence, access to inexpensive energy sources (carbon based fuels and electricity) triggered a monumental amount of economic growth and a phenomenal rise in living standards in a historically short amount of time.  Of course, we now have pollution and other byproducts of the Industrial Revolution to contend with.  But the simple truth is the astounding economic growth of the past 300 years resulted to a large degree from ever increasing access to cheap energy.  Cheap energy and the technology developed to exploit it made modern life possible.   

Why is energy so important to economic growth?  Because energy is a key input into all economic activity.  From manufacturing to transportation to farming to fast food to government offices to hair salons to slimy corporate lawyers peddling excuses for their greedy clients to sordid lobbyists plotting to kill health insurance coverage for all to the performances of rock stars in large arenas, energy is an input into essentially all economic activity.  If the cost of energy is lowered, all economic activity gets a boost and economic growth in all sectors of the economy is facilitated.  

It's no accident that America's economy grew briskly in recent years concurrently with a drop in the price of natural gas, solar and wind energy, and to some degree, oil.  The proliferation of fracking not only has capped the price of oil, but also created demand for a lot of drilling equipment, trucks of various kinds, and so on.  So it boosted the manufacturing and transportation sectors. 

We use enormous amounts of energy stored in the past to make our current lives more comfortable and enjoyable.  We now understand we can't keep relying so much on energy from fossil fuels.  We have to develop more sustainable lifestyles.  However, in order to maintain and improve our lives, we need to continue our access to cheap energy in better ways.  After decades of frustration, solar and wind energy have actually become cheaper than fossil fuels.  That is a very positive development.  More technological advance is needed. 

The policies needed continue the availability of cheap energy would be varied and sometimes controversial.  Increased federal funding of basic research is an obvious one, although the GOP has done much to cut this from the federal budget.  Republicans seem fear science.  But ignorance will not spur economic growth.

Building more gas pipelines is obviously controversial to the NIMBY crowd.  But we do need better distribution systems for gas--and electricity as well.  All the windmills and solar farms in the Plains states won't do much good without power lines to transport the electricity to the big cities that need the power.  These power lines entail a huge NIMBY problem.  But this will have to be dealt with somehow, because distribution systems have to be enhanced if there is to be growth.  We need not bow to big, bullying energy and power companies and give them everything they want.  But we should acknowledge the need for better distribution systems.

Fostering greater fuel efficiency also helps to lower energy costs.  It may not lower the stated price per unit, but it reduces the number of units people have to buy.  So it would help to pursue efficiency as well as reduce unit costs.  One hidden cost of efficiency, though, is people consume more energy when it effectively becomes cheaper--many ordinary cars and SUVs today have engines that are as powerful as those in the muscle cars of the 1960's, since engine technology has improved so much, and people drive more miles per year.  So greater efficiency isn't an improvement if it doesn't reduce the use of fossil fuels.

There are many other factors besides energy that affect economic growth.  But a lot aren't controllable by any branch of the government.  Energy policy, though, can be implemented through government.

In the 1940's, 50's and 60's, the U.S. had ultra-high marginal tax rates, not that much deficit spending (the government focused on reducing the deficit, not increasing it), a rather inactive Fed, relatively high wages that provided for a comparatively equitable distribution of wealth and income--and an era of brisk economic growth and low unemployment.  This is an era still remembered as a golden age in America.  Why?  Because oil was damn cheap.  What happened after the first OPEC oil embargo in 1973?  A decade of economic stagnation followed by decades of economic uncertainty.  When we had cheap energy, we had lots of prosperity.  When energy rose sharply in price, prosperity as we had enjoyed it went away and still hasn't returned.  We don't need to sell our souls to the fossil fuels companies.  But we need to recognize that our standard of living and future improvements to our standard of living are dependent on access to cheap energy.  And we need to find responsible and sustainable ways to keep that gravy train rolling.

Thursday, July 4, 2019

Donald Trump's Fourth of July

Once upon a time, a dark lord, with the furtive connivance of a despot on a distant land, tricked the good people of an exceptional nation, a nation of manifest destiny, into choosing him as their elected leader.  The dark lord cast wicked spells over many of the citizens and deluded them into thinking he would bring them succor from their struggles and sorrows.  Not all of the people of the land were fooled, and many stoutly resisted the dark lord.  The dark lord stumbled and flailed in his sordid attempts to oppress and persecute the people, and gnashed his teeth over his repeated failures.  To glorify and aggrandize himself, and deceive the people into believing in his witchcraft, the dark lord misappropriated unto himself a national holiday, and strove with pretense and chicanery to make it into a celebration of himself.  But the heavens were not fooled.  When the appointed day for the holiday arrived, dense clouds appeared in the skies and showered the land with tears--tears for the los pobres and los ninos kept in the dank dungeons of the dark lord; tears for los desaparecidos, the children separated from their parents, never to be re-united.  And thunder, the angry rumblings of the skies, signaled celestial disapproval of the necromancer. The dark lord, heedless of the portents, pressed on with his depraved revelry.  But what will be the price of his recklessness?

Tuesday, June 25, 2019

To Increase Inflation, Increase Incomes

The Federal Reserve Board is desperate to increase inflation to 2% per year.  It believes that a 2% level of inflation will promote economic growth by giving businesses greater pricing power and the ability to repay debt with less valuable dollars.  Right now, inflation as measured in the way the Fed prefers, runs about 1.6% per year, and remains stubbornly below 2%.

There's no economic research that definitively shows anything magical about 2% inflation being the key to the Goldilocks economy (i.e., not too hot and not too cold).  The figure is just a guess.  But if we were to accept that 2% has miraculous powers, then why has inflation persisted in staying lower?  With unemployment levels running at historic lows of about 3.6%, one would expect inflation to be moving up briskly.

Economists believe consumer expectations have a large role in determining the rate of inflation.  If people expect inflation, then there will be inflation.  If people don't expect inflation, they will resist price increases and inflation will be hard to come by.  Right now, inflation expectation are low.

Why would people today have such low expectations for price increases?  Perhaps the most obvious reason would be because they don't have the money to pay increased prices.  Wages, adjusted for the mild inflation we've had, have stagnated for decades.  The middle class, who are key consumers in the national economy, just aren't bringing in any more.  So they not surprisingly feel that they can't pay more and would resist price increases.  If the Fed wants to pump up inflation, it should hope that people get paid more.

With unemployment reaching an astonishingly low 3.6% level, one might think employers would pay more to get new hires and keep existing employees.  But that's not happening much.  Here and there, pay is jumping up.  But on the whole, incomes are mostly in a rut.  There pretty much is nothing the Fed can do to increase worker pay.  But it shouldn't hold its breath waiting for inflation to boost the economy. 

Sunday, May 26, 2019

Do the Unicorns Signal a Market Peak?

Unicorns in the financial markets bear scant resemblance to the gentle creatures of mythology.  Companies with private valuations of $1 billion or more, called "unicorns" by investors, have been going public recently after many years of incubation by private funding.  The results haven't been pretty.  Two of the largest--Lyft and Uber--have lost value.  Snap, another large company that went public a couple of years ago, has also lost value. The sagging values of these high profile companies raise a question whether investor confidence is receding and the market is potentially headed for a downturn.

Much of the reason for the price drops is attributed to the long incubation periods for these companies, during which their values rose into the billions.  Whereas 20 or 25 years ago, companies might go public after having achieved valuations of a few tens of millions, unicorns have provided enormous returns to venture capitalists, early employees and other private investors before the retail schlemiel is given a chance to lose his money.  In other words, the upside pop that often accompanied ipo's in the past has already been pocketed by the smart money.  What remains for Ma and Pa trying put a little money into their IRAs is the uncertainty of companies that have yet to consistently turn a profit.

A hot ipo market fuels overall stock values.  Look at the 1990's, when ipo enthusiasm grew so vast that things got out of hand and the 2000-01 downturn took some 70% off the value of the Nasdaq index.  The recent unicorn fails will dampen further ipo activity.  The smart money was too clever by half in using ipo's as a way to vividly demonstrate to retail investors that they are but a septic system for the rich and well-connected. As President Trump's trade wars continue, the chances for a no-deal Brexit increase, and investor enthusiasm wane, the chances for a significant market downturn rise.  The unicorn ipos may signal a peak in stock prices.  Embrace cash.  In uncertain times, it's worth its weight in gold.

Monday, May 13, 2019

Will Russia Blackmail Mark Zuckerberg?

The news media has been running many stories lately about calls for the U.S. government to break up Facebook.  One idea is to separate Facebook, Instagram and WhatsApp, all of which are owned by Facebook and all of which are controlled by Mark Zuckerberg.  These three websites together dominate social media, and advocates of a breakup express concern about monopolization, and also the potential impact on freedom of speech of having so much of the social media business under a single corporate roof.  Indeed, it's not just a concern about a single corporate holding company.  We're talking about one guy--Mark Zuckerberg--who controls all three of these dominant sites.  Zuckerberg arranged to have himself given supervoting shares of Facebook when the company went public.  So he single-handedly controls everything at these three companies even though he has taken a lot of money from public investors.

Special Robert Mueller indicted a bunch of Russians and Russian companies for interfering with the 2016 election, and his redacted report discusses this problem in some detail.  U.S. intelligence agencies are supposedly combating Russian efforts to muck around in the 2020 election.  Only time will tell how effective the countermeasures are.  We may get a preview from the European Parliament election taking place later this month, which Russia is reportedly trying to influence.

But there's a simpler strategy for Vladimir Putin:  blackmail Mark Zuckerberg.  After all, Zuckerberg controls the whole shebang, and if you control him, you're in a sweet spot.  Zuckerberg is human like the rest of us, and all Putin and his henchmen need to do is find out what his weaknesses are.  This surely has already occurred to them, and they no doubt are nosing around in Zuckerberg's past as much as they can.  They'll try to tally every beer he drank before turning 21, and everything he may have smoked or snorted.  They no doubt will be pro-active, which is an integral part of Russian spycraft.  Pro-activity in this regard could mean things like ensuring that Zuckerberg has the opportunity to meet very attractive, friendly and easy-going women wherever he is, and only later might he find out that they had tiny cameras.  If Putin succeeds in getting a pee tape or its equivalent featuring Zuckerberg, Mark will be in a bad place.

U.S. antitrust law doesn't provide that a company can be broken up because its CEO is subject to blackmail by a foreign nation.  But there seem to be good arguments for contending that Facebook satisfies the legal requirements for splitting it up.  And the distinct possibility that a hostile foreign nation would want to blackmail Zuckerberg provides additional reason to be concerned about allowing today's monolithic Facebook to keep lumbering along. 

There may be some who would suggest that Putin already controls the U.S. government, and would through his proxy (you know who) stop the Justice Department and Federal Trade Commission from taking action to break up Facebook.  Whether or not this is true, Putin would want to blackmail Zuckerberg if he can.  The government--at least those parts of the government that still adhere to their oaths to support and defend the Constitution--should do whatever is possible to stop this from happening.  The rest of us may want to consider taking a break from Facebook, Instagram and WhatsApp.

Thursday, March 28, 2019

Does the Mueller Report Contain the Evidence for the Impeachment of Donald Trump?

The report of Special Counsel Robert Mueller has been completed, but not released publicly.  All we have is a letter from Attorney General William Barr stating that Mr. Mueller concluded the evidence he had accumulated of Donald Trump and members of his administration possibly conspiring with Russians to interfere in the 2016 elections was insufficient to justify criminal charges.  Barr's letter also said that Mueller could not decide whether President Trump or others had obstructed justice but that Barr had concluded they had not.

A storm of controversy has arisen over the fact that the report itself is not public and therefore neither Congress nor the public can evaluate Mueller's evidence for themselves.  Whether or not the report will be released in full remains to be seen.  But the delay in releasing the report leaves open the question whether the report contains enough evidence to warrant the impeachment of President Trump.

Criminal charges need to be proved beyond any reasonable doubt.  That is the standard ("burden of proof" is the legal term) that Mr. Mueller would have been working with when he, according to Barr, decided that criminal charges for conspiracy with Russians could not be proven.  That would have also been the standard Mr. Barr worked with when he decided that obstruction of justice charges were not warranted.  But the Constitution does not specify any particular burden of proof for impeachment.

The impeachment process contains two stages.  The first is impeachment--or, the leveling of charges--by the House of Representatives.  The House decides whether there is enough evidence to level charges against the President.  Grand juries in America can level charges (by issuing an indictment) when they believe there is probable cause to believe that the defendant committed a crime.  Probable cause is a much lower standard than beyond a reasonable doubt.  Based on what's already been publicized about possible Trump collusion with Russia, it seems quite possible that the Mueller report contains enough evidence to support a determination of probable cause.  So impeachment by the House could be a distinct possibility if the House chose to use the probable cause standard (and nothing in the Constitution prevents it from doing so).

The second stage of the impeachment process is a trial in the Senate.  The Constitution provides, in Section 4 of Article II that "The President, Vice President and all civil Officers of the United States, shall be removed from office on Impeachment for, and Conviction of, Treason, Bribery or other high Crimes and Misdemeanors."  One might argue that the word "Conviction" implies the reasonable doubt standard.  However, the reasonable doubt standard had only begun to find its way into English law in the 1780's, when the Constitution was written, and was not explicitly recognized by the U.S. Supreme Court until 1881 (see Miles v. U.S., 103 U.S. 304 (1881).  Thus, the Senate is not bound by the reasonable doubt standard, and could impeach President Trump because it believes that grounds for impeachment have been proven by, for example, a preponderance of the evidence or by clear and convincing evidence, both of which are lower burdens of proof used in different types of civil court cases.

It's been reported in the press that the Mueller report is lengthy and detailed.  Thus, it surely must contain a great deal of evidence.  Because of the possibility that the Mueller Report may contain enough evidence to support the impeachment and removal from office of President Trump, it is imperative for America's democracy that the full report be immediately released to Congress and the public.

Friday, March 22, 2019

A Presidential Limerick

There was a President named Trump,
With a heart of coal, just a lump.
He whistled to dogs and loved demagogues.
And feared most of all stocks would slump.

Thursday, March 14, 2019

The Most Chilling Thing Donald Trump Has Said

President Donald Trump reportedly has just threatened violence against his political enemies.  According to a news report, he said that his supporters (whom he identified as the police, military and Bikers for Trump) "could get 'tough' on his political opponents at a 'certain point'"  and "'then it would be very, very bad.'"  (See https://www.thedailybeast.com/trump-warns-it-would-be-very-bad-if-my-police-biker-gang-fans-decided-to-get-tough-on-my-opponents?ref=home.)  This invokes the specter of the criminal violence of Nazis against their political enemies in the 1920s and 1930s.  The conduct to which Trump alludes wouldn't be legal.  But perhaps he thinks he will be protected by the U.S. Department of Justice policy against indicting a sitting President.  Maybe he thinks this will allow him to establish a dictatorship, thus permanently insulating himself from prosecution.  The Justice Department could end up looking like a bunch of ineffectual, complicit patsies while the Constitution is destroyed.  By all indications, the GOP Senators and Representatives won't have the guts to stand up for democracy--never before in American history have so many cowered so much before such a despicable man.  The Democrats in the House and Senate, and the federal courts, could and likely would attempt to stop incipient totalitarianism.  But the means at their disposal are limited if Trump defies the lawful measures they could take (especially if he inflicts political violence on them).  In the end, it will probably be up to the American people to stand up to and overcome Trump's threats of political violence.  But Americans shook off the chains of tyranny once before, in a struggle that began in Lexington and Concord and ended in Yorktown.  If necessary, they can--and will--do it again.

Wednesday, February 27, 2019

The Most Chilling Thing Michael Cohen Said About Donald Trump

Today, President Trump's former personal attorney, Michael Cohen, testified before Congress about his decade or more of dealing with Trump.  Cohen's testimony indicated Trump may have suborned perjury, violated campaign finance laws, conspired with Russians to undermine the Presidential election of 2016 and even possibly violated the draft laws of the 1960s in order to avoid service in the Vietnam War (which would have been a crime).  All of these could be serious offenses, although the draft violation, if there were one, would no longer be prosecuted today. 

But the most chilling thing that Cohen said was, "Given my experience working for President Trump, I fear that if he loses the election in 2020 that there will never be a peaceful transition of power."  See https://www.thedailybeast.com/cohen-if-trump-loses-in-2020-i-fear-there-will-never-be-a-peaceful-transition-of-power?ref=home.  It's one thing to have a criminal in the White House.  That, although very, very bad, has by all accounts happened before and America survived the experience.  But a felonious dictator is far worse.  America established the tradition for modern democracies, with the key element that elected officials step down when their terms are over.  Indeed, this is what most distinguishes America from the monarchies that preceded it.  The first President, George Washington, could easily have been crowned monarch of the United States had he wanted it.  But he did America perhaps his greatest service by stepping down at the end of his second term and retiring quietly to Mount Vernon.  That, more than anything, is the bedrock of democracy that makes America great.

Would Trump attempt a coup d'etat if he lost the 2020 election?  Michael Cohen, as Trump's personal attorney for about a decade, knows Trump better than almost anyone.  Having already pled guilty to perjury before Congress in 2017, he has little reason now to lie, as he knows the cost of perjury.  And Trump's well-publicized affinity for despots (think Vladimir Putin, Kim Jong Un, Xi Jinping, and the rulers of Saudi Arabia) ominously buttresses Cohen's assertion.  There is no procedure written into the Constitution for fending off a tyrant (who by definition would refuse to honor an impeachment proceeding).  Neither Congress nor the federal courts have the means to remove an autocrat who might flaunt the law in order to stay in power.  But Americans have dealt with tyrants before.  These were ordinary Americans, many of whom assembled quietly in the early hours of April 19, 1775 in Lexington and Concord to await the tyrant's redcoated soldiers.  And these farmers, tradesmen and other civilians were victorious.  In America, right makes might.  While we can hope that if Donald Trump tries unlawfully to seize power we don't need to take up musket, powder and shot, we must remember that the greatest defense against oppression and subjugation is the righteousness of a democratic citizenry.