Thursday, April 7, 2016

The bad news is why I'm optimistic

In the seven and a half years that I've been doing this blog, I've been accused by many readers of being relentlessly and even dangerously optimistic (e.g., "do you ever seen any negatives?"). It's true that I have been reliably optimistic, even in the face of a series of selloffs and corrections. However, I've explained that my optimism is not optimism per se, but optimism relative to a market that has been generally pessimistic. Ever since early 2009 I've predicted that, while the economy was likely to grow, it would be a disappointingly sub-par recovery, mainly because of headwinds like high marginal tax rates, "stimulus" spending, increasing regulatory burdens, Obamacare, anti-business sentiment, and uncertainty surrounding the Fed's monetary policies. Even though I foresaw sub-par growth, I thought that it made sense to be bullish because the market expected even less (remember all the "double-dip recession" calls and ECRI's recession call in 2012?). So far, my optimism has been warranted.

Now, let me be specific about all the negatives I see out there, especially the relatively new ones. There are LOTS of negatives, but I'll try to be brief.


The biggest negative of them all is that the US economy is not nearly as large and as healthy as it could or should have been, had policies been better designed. This has been the weakest recovery in post-war history, and by a lot. If the economy had rebounded from the Great Recession with the same vigor it displayed in every post-war recovery, national income would be almost $3 trillion higher than it is today, as the chart above illustrates. Per capita income would be almost $9000 higher, and a family of four would be making $35K more every year. That's real money, and it explains why the electorate is so upset these days with the establishment.

As I noted some years ago, all the spending and borrowing that was supposed to "stimulate" the economy was essentially flushed down the toilet. Since 2009 we've conducted a laboratory experiment in the power of government spending to grow the economy by stimulating demand, and the result is proof that Keynesian theories are destructive, not stimulative. Neither government spending nor easy money has the power to create growth out of thin air, but politicians want to convince you that they do. The economy is weak today because we have wasted many trillions of dollars on transfer payments that only create perverse incentives to work less.

A few days ago, Treasury Secretary Jack Lew unleashed a regulatory broadside against large corporations seeking to become more competitive in an economy with an absurdly burdensome tax code. As Pfizer's Ian Read noted in today's WSJ:

This week’s Treasury action interprets the tax laws in ways never done before. This ad hoc and arbitrary attempt to single out and damage the growth opportunities of companies operating within the current law is unprecedented, unproductive and harmful to the U.S. economy. 
The action was accompanied by much unfortunate rhetoric about tax avoidance. No one was shirking their U.S. tax bills. In a merger with Allergan PLC, an Irish company, we would have continued to pay all federal, state and local taxes on our U.S. income. All that these new rules will do is create a permanent competitive advantage for foreign acquirers. Simply put, there will be more foreign acquisitions of U.S. companies resulting in fewer jobs for American workers.

If the rules can be changed arbitrarily and applied retroactively, how can any U.S. company engage in the long-term investment planning necessary to compete? The new “rules” show that there are no set rules. Political dogma is the only rule. 

Why punish our most successful companies, when it would be so much more reasonable to simply revise our tax code so that U.S. businesses are not double-taxed on their foreign income, and are not taxed at the highest rate in the developed world? If the objective is to have more money to redistribute to the "poor" it's doubly stupid, because income redistribution only creates perverse incentives. Unfortunately, we've been seeing a lot of stupid policies out of Washington, for about as long as I can remember.

Why tear down the rule of law upon which our country was built? As an aside: if Hillary escapes prosecution for what are almost certainly serial and willful violations of U.S. intelligence and secrecy laws, while the Clinton Foundation has every appearance of being massively corrupt, think of the example this sets. When rules are only for the little people, trust in government goes down the toilet almost as fast as government "stimulus" spending. Even Hillary acknowledged this when she said "There’s no daylight on the basic premise that there should be no bank too big to fail, and no individual too powerful to jail."

And then you have the problem that there is way too much ignorance of the fundamental laws of economics these days, especially among the political class. How else to explain Trump's vow to impose huge tariffs on Chinese imports? Or California's decision to raise the minimum wage to $15/hour? Or the $370 billion of M&A deals aborted on Obama's watch? These policies are virtually guaranteed to lead to perverse outcomes. It takes magical thinking to believe that a $15 minimum wage will do anything but shrink job opportunities for youth. At its worst, this exercise in hubris will lower living standards for all Californians, by sending jobs elsewhere and increasing poverty among the young. Raising the prices of Chinese imports will certainly be a negative for all consumers, but won't provide any guarantee of creating new domestic jobs.

And then you have the failure of our educational system, which has allowed a generation to grow up thinking that socialism is the wave of the future. How else to explain the huge popularity of Bernie Sanders?

I won't dwell on the Dept. of Labor's new rules which will place more onerous requirements on private sector financial advisors and push more people into government-run savings plans. (Who in their right mind would trust the government to invest your money?) Or the ongoing failure of Obamacare, which has only pushed up healthcare costs for everyone while restricting choice, all but ensuring that we will have a growing shortage of doctors in the future. Is it any wonder that the only two institutions that affect most everyone in the country and which provoke the most concern and frustrations—education and healthcare—are almost entirely under the control of government? If a private sector business delivered the miserable results that we find in education and healthcare it would have gone out of business a long time ago.

Then of course you have the problems of the slowdown in the Chinese economy and the collapse of oil prices, but these are problems which can presumably be solved if market forces are allowed to operate, as I've argued in numerous posts of late.


Now, of course none of this is a secret. The market is fully aware of all these problems, and anyone paying attention to quality news outlets and scouring the internet should not be surprised to hear it. There's lots of bad news out there, and that's why I think the market is still dominated by pessimism. The chart above makes my point: 5-yr real yields on TIPS are trading at levels which suggest that the market expects real GDP growth in the U.S. to be somewhere in the neighborhood of 1-2% per year for the foreseeable future. The market has been underestimating growth for years, and it continues to see weak growth ahead.

But it's not enough to be worried about the future, or to be optimistic. You have to match your knowledge and expectations against the expectations that are built into market prices. If you think the market is too pessimistic, as I do, then you should be optimistic, even though you don't expect real GDP growth to be more than 3% a year for the foreseeable future, and you fully expect the economy to be stuck in a slow-growth rut until policies change for the better.

I'm still optimistic, mainly because there are so many problems out there and because expectations are so dismal. But here's the kicker: if we could just fix a few things that are so easily fixable (e.g., the tax code, burdensome regulations), the potential for an upside growth surprise could be gigantic. How hard can it be to do the right thing?

50 comments:

Rob said...

But Scott, Russell Redenbaugh believes the "footprints of policy" are a big downer for the stockmarket in the near future because the smart money is on a Hilary Clinton presidency. Yet more loony lefty socialist policies for years to come, all the time weakening the US ability to bounce back. Doesnt this temper your (relative) optimism ? Thanks.

Scott Grannis said...

I think the outcome of the election is highly uncertain at this point. Too many variables are in play to have confidence in any forecast. Can policies get much worse than they already are? Doubtful, but possible. Can they get better? Yes, and by a lot. I'm guessing the odds are skewed towards improvement, especially since bad policies have proven to not work.

Houston Advisor said...

Why doesn't the Republican House and Senate act on all of these issues? Tax reform should happen tomorrow. Regulatory reform should happen tomorrow. Until we realize the governance system is broken, we won't fix these problems. Time for a new Constitutional Convention. Founding Fathers would be disgusted at how perverted the system has become.

Scott Grannis said...

The reason I like Cruz is that I believe he understands these problems and their solution much better than any other candidate. He firmly believes in limited government, personal freedom, free markets and capitalism.

marcusbalbus said...

mostly well said, in particular about the pfizer situation, but you still mewled for more QE as soon as stocks were down 12%. somewhat a hypocrite there, and many of your "optimisms" are based in sophistry (such as "earnings yield").

Benjamin Cole said...

Great post, and I for one salute Scott Grannis on his optimism. Without optimism, there is no point in getting out of bed in the morning. The Western world has been winning for a few hundred years now, with many horrible lapses. I bet that will continue.

Cruz?

Well this is what Cruz recently told TIME magazine:

"There’s no doubt Donald Trump has energized and excited a great many people. And I’m grateful to him for doing so. The issues that brought those voters into the political world, the need to secure our border, stop illegal immigration, stop the failed immigration policies that have driven down wages and taken away jobs from struggling Americans.The need for a common-sense trade policy that doesn’t continue to ship jobs overseas and force Americans to compete on an unfair playing field."---Ted Cruz, interview, TIME magazine

Well. Cruz is a fake, or wants some heavy federal hands on international trade and immigration. He has been pretty good at Bible-thumping too.

Of course, I wonder what any federal office holder can do about economy-suffocating and increasingly stipulative local property zoning, or the criminalization of push-cart vendors. Sadly, the GOP seems foursquare behind stripping property owners of development rights, and who wants grubby push-cart vendors in their neighborhood? The Dems are worse.

Nor will Cruz likely do much about the $1 trillion-a-year tax-financed structural impediment named "national security and foreign policy." At least Cruz has questioned endless US involvement in failed Mideast nations. In this regard, Hillary Clinton is far more dangerous than Cruz. Hillary wants US troops back on the ground in Iraq.

If the Fed's monetary policy is "uncertain," it surely is not because the market thinks the Fed will become "too easy." See:

Bankrate: Mortgage Rates at Lowest Level in Nearly Three Years

07:30 ET - News Release

"Mortgage rates continued dropped even lower this week, with the benchmark 30-year fixed mortgage rate slipping to 3.75 percent, according to Bankrate.com's weekly national survey."

--30--

Meanwhile, !0-yeat Treasuries are at 1.71%. Institutional lenders say inflation is dead for the next 10 years.

The Fed is way too tight, and has been since at least 2007. The market seems to be telling us that.

But, like Grannis, I am mildly optimistic. The free parts of our nation and world are incredibly inventive. Tight money and federal taxes are burdens. Local property zoning is choking off development and growth, preventing highest and best use of land and resources.

But things were worse in the 1960s (well, monetary policy was better) and the USA boomed, boomed, boomed, boomed, boomed. The 1990s were great too.

It can happen again.




steve said...

Sadly the only way you can really be optimistic is to hope for more gridlock in DC. If Trump or Hillary get in and get their way I see NO WAY of being positive. The Clintons are crooks but most people just don't give a damn. Pitiful bit true.

Johnny Bee Dawg said...

Outstanding post. I've made money for many years by betting that reality would not be as bad as the pessimism. That's why I've thought stocks have been "cheap" for years. But with the new PUB strategy of funding Barack's policies instead of fighting them, I'm more cautious than in many years. I bought the "pushback" from the American people that began in 2009, but am worried We The People no longer have an advocate in power.

Risk aversion will truly erode only if our politicians move to restore the rule of law. But we've lived with risk aversion for many years. I expect that will continue, and I guess we will live another 8 years. For now it's sub 2% growth. Markets don't want to collapse, and Yellin REALLY wants to prop them until election. Markets know how easy it is to fix what's wrong with small changes at the margins. I just don't think that Ted is all that Constitutional, and pragmatically, I don't think he will flip a single DEM state. There are more Takers than Makers and his schtick doesn't work on DEM voters. So on we plod.

Burton Rothberg said...

Scott, you might want to read this research report by the Fed of NY. http://libertystreeteconomics.newyorkfed.org/2016/04/reconciling-survey-and-market-based-expectations-for-the-policy-rate.html
It describes a technique for measuring the risk premium of interest rates, but if you download the results, you will see that it has implications for equities. The key is that the rate includes a risk premium for ensuring an investor's full portfolio. This can be positive or negative depending on what the investor is worried about. The series went actually negative in Jan and has not recovered despite the recovery in most risk markets. This is probably due to worries about recession and deflation and adds to the evidence of your view.

Hans said...

This is now and has been a recovery solely by the making of
the FRB and it's policies.

In other words, the security markets and the economy in general
have been manipulated by one or more governmental agencies, with
the approval of many.

It may also explain why America has not seen 3% + growth since
2005.

Of course, if you use BEA's stats it will show robust growth for
most years.

http://www.multpl.com/us-gdp-growth-rate/table/by-year

In fact, the chart used in this thread does not match their own
figures.

Scott Grannis said...

Hans: the link you offer refers to nominal GDP growth, not real GDP growth, which is what I use in the second chart of this post.

Ghost Dog said...

How hard can it be to do the right thing? Damn near impossible, at least until everything else is tried.

The Cliff Claven of Finance said...

Good column.

Not enough on the high probability that Hilary, Donald or Bernie will be the next President.

Not exactly an economic "dream team" .

In addition, debt, stock market valuations and bond market valuations are all very high relative to GDP.

In the past, bad things have happened after debt was an unusually high percentage of GDP, such as the 1929 recession, the dot.com bust after 2000, and the mortgage bubble bursting in 2007/8

It might seem clever to stay bullish all the time as an economist, since you'll be right 80% of the time (assuming 2 recession years in each decade) ... but as a group economists have NEVER predicted a recession.

This is a time to be cautious because the zero interest rate policy "experiment" now seems to be doing very little.

There is no economic history to judge whether ZIRP was a good or bad policy -- these negative government bond interest rates outside the US are a black swan extreme situation with unknown consequences.

Having Trump anxious to start a trade war, and a true socialist winning so many primaries in a row, is not exactly comforting economic news!

I think Hillary would look good in a black and white striped pants suit.

Hans said...

"Scott Grannis said...
Hans: the link you offer refers to nominal GDP growth, not real GDP growth, which is what I use in the second chart of this post."

Mr Grannis, if the real GNP numbers that the BEA is using means chained in 2009 dollars, then
it would agree with the number given by the World Bank of 3.3% for the 2005.

The BEA also list, in the first column "GDP in billion of current dollars" would
represents GNP growth of only 2.6%. This is a difference of some 21%.

Scott Grannis said...

You can find all the GDP data here:

http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1

Benjamin Cole said...

Minor quibble:

I do think any professional advising the elderly on retirement finances should be a fiduciary, and fees should be clear and in plain English.

The DOL solution strikes me as poor, and also the recourse to civil courts, rather than FINRA, to resolve disputes. That will be a mess.

But perhaps it is time for the financial industry just to make a clean sweep, and move to a fiduciary and plain english standard in total.

I have elderly women in my extended family who have simultaneously paid name-brand brokers AUM fees to put into her wrap accounts and mutual funds that then paid additional commissions to brokers.

Of course, portfolio performance was average, as beating the market (EMH) is unlikely.

To any readers: If you have elderly relatives or friends, take a look at their finances, and who is fooling with the money. Broker-dealers are salespeople, not fiduciaries, and want to stay that way.

Simple ETFS, in the S&P 500, bonds, and perhaps some foreign exposure, are usually enough for anybody. Vanguard funds are another option.

Good luck everybody.

steve said...

Let me tell you what is NOT in the market: Hillary being indicted. That would make Sanders the presumptive nominee and the market would TANK.

William McKibbin said...

I am very excited by our nation's plans to impose 35-45% tariffs on imports of energy, automobiles, consumer electronics, and textiles. Prices and margins for domestic production will rise sharply creating vast opportunity for domestic manufacturing. The U S has nothing to lose with tariffs (unlike 100 years ago when the US was a net exporting country) and everything to gain within in the long-term. Moreover, deficit spending would be abruptly halted as China and other countries respond by halting treasury purchases. Real investors who are liquid will lead the US into a new manufacturing era in the 21st century. Past beneficiaries of deficit spending will be wiped out once and for all. Government spending will be cut to the bone once treasury sales collapse. The long-term prospects for our nation are great once again. My advice to investors is go with the emerging economic realities settling upon our country. Young investors have much to be excited about!

AUGUST said...

The Pfizer debacle is revealing in that it represents another instance where the business sector refuses to fight the Government every time government makes its own laws.

PerformanceSpeaksForItself said...

Hi Scott,

I don't have FT subscription, so correct me if I'm wrong, but I would assume that the "aborted" M&A under Obama has been all/mostly antitrust related. As a lawyer who's worked on antitrust suits on behalf of the behemoths trying to merge, I'm glad Obama has had such success and I wish he had more. Clayton Act exists for a reason.

Also, you mention above that Ted Cruz "understands these problems and their solution"...does it give you pause that he hired former Sen. Phil Graham as a senior economic advisor? That hire tells me Cruz knows squat outside of rhetoric and his economic policies will be driven by proven corrupt and incompetent hacks.

Hans said...

Thank you for the link, Mr Grannis.

Hans said...

"Simple ETFS, in the S&P 500, bonds, and perhaps some foreign exposure, are usually enough for anybody. Vanguard funds are another option."

Ben Jamin, most excellent advice. It would behoove people to listen to your council.

Perhaps as Mr Grannis is opining a contrarian thought he may indeed be correct. In
the macro sense, as long as America continues it's Socshevik drive, annual GNP will
will under perform.

The flight of capital from our shores is just another indication of future problems
that this nation faces.

Mr Grannis has listed the remedies which MUST be undertaken but unfortunately
the Beltway has no backbone to make America great again.

I am sorry, however, I am not a member at this time of the Optimist Club nor will
be unless there is several decades of Conservative rule.

Too many Socshevikes, RINOs coupled with a shortage of Constitutional Conservatives willing
to take to the fields.

My dear friends, time is fleeting. The United Kingdom of America is upon us.

Benjamin Cole said...

I may vote for Sanders as the only honest candidate in the race.

Sanders is a socialist, and says he is a socialist.

The other candidates are socialists, or socialist-nationalists, but claim not to be.

We might better avoid fantastically expensive and lengthy foreign entanglements if Sanders is the next president.

I have my tomato shield up!



Hans said...

"The United States is the world’s largest economy. Yet, in the last two decades, like in the case of many other developed nations, its growth rates have been decreasing. If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level."

http://www.tradingeconomics.com/united-states/gdp-growth-annual

The marco trend needs to be examined as over the past three decades
there is a clear and unabridged declining values.

Quarterly nor yearly respective will miss the mark.

Been Jamin, the socialist-nationalist label is the latest claim made by
an author at the Library of Economics and Liberty. It was opined that
Col Sanders was one. This would certainly include Bolsheviks and Mensheviks
as well.

The theory behind this neo identity could be because one can not export
governmental units nor their agencies.

On the over hand, I was taught in grade scoool that both Socialism and
Communism were world wide movements.

The bac•ca•lau•re•ates must have used neo-revised-history books and neo-educators.

Open borders; diversity; smor•gas•bord equality are no hallmarks of a Nationalist.

BTW, few if any invoke the word, as it is viewed as a pejorative and anti-contemporary
American culture.

honestcreditguy said...

Currency wars are not a reason to optimistic along with fed induced pricing of risk....

I was optimistic about the govt. allowing returning soldiers whom risked their lives in multiple wars get fha, fnma, freddie repos for pennies on the dollar like the PE and pigmen investors whom benefited via the fed, treasury and govt. bubble inaction-actions. It didn't happen! I was optimistic until the govt. chose winners and losers and moral hazard was trampled on by the fearful govt. The prudent and savers whom built the country were spit on and buried alive by the speculators and true idiot savants of the nation.

It's good to be optimistic but a spade is a spade. The countries govt. failed at all levels and will never right the ship. Same snake, 2 different heads is now a control mechanism for idiocy across a fabricated decaying landscape...

Benjamin Cole said...

Sanders is a socialist and I give him credit for being honest about it, unlike his rivals in both parties.

He strikes me as less nationalistic than the others, at least in the way I am using the word.

Judging from rhetoric, the current right-wing wants to crush international trade and immigration, while ramping up federal military expenditures and expeditions.

I regret to say, if one believes what our candidates are saying, Sanders may actually be the best choice.



Frozen in the North said...

The big spending by the Federal Government was the massive bail out of the banks -- and that didn't take place in 2009, but in 2008. Render to Cesar what belongs to Cesar! Paulson and Bush were they guys who spent the hundreds of billion. Not the other guy! As for the rest, considering your support for Ted, I am surprised, historically, investors have done better under a Democrat administration than under a Republican one.

Frozen in the North said...

Also

Nice talking point of corporate tax rates being so very high in the US. More interesting is the effective tax rate, and in the US, despite a 39% corporate tax rate the effective tax rate paid by corporations is around 26% -- in line with everybody else, except Ireland and its friends.

I and everyone else agrees that a reform of the tax code would be a great idea, but is there any universe in which the two houses and the White house could work something out? You've got the crazies that want zero taxes for corporations -- you've got the socialists that want marginal tax rate on anyone or anything that earns more than $50k a year to be 90%. In that environment I cannot see how you can re-write the American tax code.

So America will have to live with what its got. Also if you consider Congress' ability to write legislation, they would probably succeed in making a new tax code even more complicated and longer too!




Lawyer in NJ said...

I prefer the non-polemical, data-dominant posts. But hey, it's your blog; I get that, and read it regularly because of the majority of posts fit the description of the first sentence.

Johnny Bee Dawg said...

Shrinking GDP is a predictable result of increased government power and debt to GDP %. Zero sum: government power comes only at the expense of the individual.

President Hillary promises she will bring more taxes, more regulations, and more redistribution of wealth. That means 8 more years of malaise and risk aversion.

Kinda like an extra 2 terms of FDR.

And Ted Cruz has zero chance of flipping a single DEM state that Romney lost. Takers gonna take.

Rob said...

From today's "Reading The World" newsletter by Russell Redenbaugh:

"As we wrote last week (RTW 4/4/16 - It’s (Still) the Election, Stupid) two key markets are giving strong and
consistent signals about our government economic policy future. Odds of an anti-growth economic policy agenda
occurring in 2017 are increasing with political betting markets odds of a Democratic presidential candidate rising
above 70%. Economic betting markets, most notably the U.S. stock market, have taken notice with the S&P 500
down 13% in real terms this year."

steve said...

Scott, so I guess a fair question, given your proclivity to see glass half full-which I agree with is what would change your mind and make you more NEGATIVE?

Johnny Bee Dawg said...

Frozen:

The bank "bailout" money has all been paid back...every penny...with interest.

Unfortunately, the DEM Prezzydint and DEM Congress spent more on their "Stimulus" Bill in 2009 with one stroke of the pen than W spent on all wars...all years combined. Unfortunately, that "Stimulus" money was pissed into the wind...wasted on political cronies and checks to individuals instead of being "invested" in "infrastructure" and productivity. So we are left with sub 2% GDP growth and massive debt bondage for future generations to pay for. PAINLESS! Didn't even come out of our pockets. Just out of our children's. Smoove, baby.

DEM Congress cranked debt to GDP ratio from mid 60%'s to over 100% in the blink of an eye. (Scott doesn't count inter-agency debt...but his ratio soared, too, during their fiscal reign of terror.). President Hillary promises more of the same. And there isn't a Newt Gingrich around to stop her this time, like there was for her "husband".

I always wanted to ask the folks that advocate massive spending and entitlements and forced redistribution and soaring debt ratios....what's their end game? Where do they see their policies eventually taking us in another few decades? What happens when they take us to negative GDP, total government dependence, and 200-300% debt ratios, for instance? Is that when we finally hit Nirvana? Anybody??

Benjamin Cole said...

Johnny Bee Dawg-- I largely agree with you, but I would also advocate reductions in "national security" spending and a return to a peacetime citizen-soldier spartan military.

Here is a funny one: many people make long faces about mounting federal national debt. The same people seem to snort coke when it comes to mounting debts to foreign nations accumulated through chronic trade deficits.

Indeed, we are told that when the Chinese buy US Treasuries and we owe them money for the next 30 years, that is actually an investment in the United States. Or when they buy U.S. property which produces rents for them in perpetuity, that is also an investment in the United States.

Interesting.

Do you suppose that is like conducting free trade with your local baker, auto repair man and butcher by constantly mortgaging off your parts of your house?

They are investing in you!

Johnny Bee Dawg said...

We buy stuff from China and consume it. And it's gone. They take the proceeds and buy our equity and lend to us and get a stream of payments from us. We take the money they lend us and piss it ALL away in unsustainable transfer payments.

And they say Trump is the dumb one.

Johnny Bee Dawg said...

Benjamin:

Before we slash all that military spending we might want to think twice or three times about China's plans for the future. Military spending is already the lowest percent of federal spending since WW2.

Michael Pillsbury's book, "The Hundred Year Marathon" was an eye opener for me. He's a 4 decade policy wonk on China who recently altered his stance on their intentions.

A quick summary here:

http://nypost.com/2015/02/08/chinas-secret-plan-to-topple-the-us-as-the-worlds-superpower/

Scott Grannis said...

JBD: We've bought lots of useful and very cheap stuff China. They have bought less stuff from the world than the world has bought from them. They've invested the difference mostly in Treasuries, which have been declining in price (because the dollar has fallen 25% vis a vis the yuan in the past 10 years). Meanwhile they've been earning an historically low interest rate on those depreciating Treasuries. We got the stuff, they ended up with assets that are declining in price. They are trapped, because they hold trillions of Treasuries; if they sold all, their prices would decline. And even if they did sell all their Treasuries, they would have to spend the money they received on other US goods and services.

The Chinese have made the same mistake the Japanese made back in the 1980s. They invested hundreds of billions in the US, only to see the value of those investments crater as the dollar collapsed vis a vis the yen. We got tons of cheap cars, they got tons of losses.

Benjamin Cole said...

Scott:

Your answer is true, but you seem to counting on a bailout from a dollar collapse as a solution to mounting foreign debts. I never thought I would hear Grannis calling for a weaker greenback!

A dollar collapse would be mildly inflationary btw.

Of course, that is another schism: The people who exalt in free trade, but also say the US should have a strong dollar. But if free trade leads to a $5 trillion trade deficit in next 10 years (as seems likely), how will the dollar stay strong?

But the way, human-interest story time: I was in the room when Shuwa (insurance guys from Japan) in 1985 announced they were buying what what then called Arco Towers (the prominent twin office towers) in downtown Los Angeles for $650 million. I think it was 2003 when Thomas Properties, then an independent public co., bought the twin towers for $250 million. They did a nice dude-up on the towers, but rents downtown are the same now as in the early 1980s. $3 a square foot, and tenants rule.

To my surprise, the towers sold for $900 million in 2013, or about $315 sf. Seems like a rich price, but then capital is seeking a home, and downtown L.A. has changed for the better in the last 20 years.

Johnny Bee Dawg: It is remarkable to me that Xi Jinping in China can become so repressive without hardly a murmur in the West. Chinese leadership may wear nice suits and have a pleasant demeanor but they are barbarians. You can't even publish a novel---a novel!---in China that is seen as subversive. Trump is a creampuff next to those guys.

China may have military ambitions.

I sense an alliance of Japan, Taiwan, Thailand, S. Korea and Australia is needed. They should build ballistic and hunter-killer subs, and sign mutual defense pacts. The US would be better to butt out, and come home.

BTW China has tried for centuries to control Vietnam, and failed. The business of profitably occupying other nations is sour one.

Taiwan has ferocious defense capabilities, including military airports built inside of mountains. Unlike an aircraft carrier, Taiwan cannot be easily sunk.

What China might gain from military endeavors is dubious, but then we have seen that military expeditions are rarely in the national interest, but still happen. They seem content to buy the house, not invade the house. Buying is cheaper anyway.

David Stockman has referred to the "welfare-warfare" complex in D.C. I think he is right.





Scott Grannis said...

Benjamin: I'm not calling for nor predicting a dollar collapse. I'm referring to the fact that the yuan has risen significantly vs the dollar. And against all currencies.

Scott Grannis said...

Re: what would make me more negative. I would be much more nervous if the market weren't so pessimistic. I would be very worried if Hillary rode in to the White House with big coattails, and liberals regained control of Congress at a time when she is advocating huge tax hikes.

Matthew Grech said...

Johnny Be Dawg: "Military spending is already the lowest percent of federal spending since WWII."

You are merely looking at the ratio of DoD spending divided by federal spending. But due to meaningful changes over the recent years, that ratio badly distorts what really is going on.

Dept of Homeland Security spending is completely fresh since 2002 and doesn't affect the ratio that you cite. And the explosion of spending on intelligence agencies (CIA, NSA, etc.) is also not included. Also, the "one-timer" spending programs (Overseas Contingency Operations) for the wars, still very significant at over $50 billion, also don't affect the ratio. Veterans' pensions fall under the DoTreasury, nuclear budget falls into the DoEnergy...

Bottom line: When you add up all the true military spending, it's about $1 trillion per year. This is a far cry from the $585 DoD number that is used in the ratio you alluded to. Basically, in order to massively waste the taxpayers' money, the govt moved the goalposts. Only under their tortured definitions is military spending as a percent of federal spending historically low. And never mind the fact that the Pentagon can't pass an audit. ("Missing" monies are thought to be between $1 and $2 trillion.)

The US Govt spends on the order of $4 trillion every year, on everything, including social security. $1 trillion is highly significant, to state the obvious.

Also something to consider: One would think that the ending of the Cold War would bring about a real decline in the ratio. After all, the USSR was a legit threat that mandated expanded spending. Nothing like that type of threat exists today. From a spending perspective, the threats aren't even close.

I think it's time we all recognize that military spending has become the massive honey pot of governmental spending. It has very little to do with actually defending Americans. I think it is deeply corrupt and vast in its wastefulness. The way the govt has changed the definitions in how it accounts for it should be an indication of just how bad it's become.

Hans said...

Where Jackie Leww broadside on unrestrained spending?

"Although the federal government brought in a record of approximately $1.48 trillion in revenue in the first half of fiscal 2016, according to the Treasury, it also spent approximately $1.94 trillion, leaving a deficit of approximately $461 billion."

http://freebeacon.com/issues/1-48-trillion-government-collects-record-high-taxes-first-half-fy-2016/

Hans said...

Mr Grech, would you rather have preventive war spending or
another world war as before, costing this nation into the tens
of trillions?

You can pay us now or pay us later.

Matthew Grech said...

Hans: Do you really believe those are the only two choices? If so, we have nothing to discuss.

steve said...

scott, thx for reply. I'm calling hillary the next pres (NO WAY she'll be indicted) and due to sanders, pick a leftie vp AND methinks she is more liberal than most give her credit for. hopefully, congress will still be in gop's hands but if not....

Hans said...

Mr Grech, I prefer maintenance over repair. The left has an innate inability
to define evil let alone observe it; hence the syndrome, "Peace in our times."

"After all, the USSR was a legit threat that mandated expanded spending. Nothing like that type of threat exists today."

Just as your friends in NATO, who's military spending is barely more than
their environmental spending, is why the continent is a hollow shell unable
to defend itself from ME terrorists.

Hans said...

Hear are pictures and a video presentation on Russian (USSR)
micro-aggression. (love the left's PC diction)

This is not a hostile confrontation?

http://hotair.com/archives/2016/04/13/simulated-attack-russian-jet-buzzes-u-s-destroyer-in-baltic-sea-from-30-feet-above/

Hans said...
This comment has been removed by the author.
Hans said...

Here is how two loonies would deal with terrorists.

The strategy would certainly reduce military spending.

http://www.marketwatch.com/video/bono-we-can-defeat-isis-with-comedy/F493E4B0-FEA8-4552-9529-B5D56C2B49D7.html

Hans said...

More provocation by the USSR.

http://freebeacon.com/national-security/russian-jet-threatened-u-s-recon-aircraft/