VIRTUAL DAN

VIRTUAL DAN

Notes from my travels around the internet

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Category Archives: Politics

Modern Monetary Theory

I have been thinking a lot lately about Modern Monetary Theory (MMT) – the economic principle that the US has defacto adopted as part of the COVID-19 stimulus package. One could argue that we had adopted it prior to COVID, but the record money printing that the US did in early 2020 cements our place in the MMT camp.

Wikipedia has a good summary of the principles of MMT. This table of the main tenents is the most enlightening. A government that has the power to issue its own currency:

  1. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
  4. Can control demand-pull inflation[6] by taxation and bond issuance, which remove excess money from circulation (although the political will to do so may not always exist);
  5. Does not need to compete with the private sector for scarce savings by issuing bonds.

So if I understand this right – as long as there is no inflation, the government can print as much money as it wants. Deficits truly don’t matter. I can see why this is so attractive to governments around the world.

A few issues I have with this. It’s pretty clear that as the government has run up huge budget deficits in the last 10 years – the money has gone into the stock market – not the economy. So the only inflation that has occurred is in financial assets, which I assume is excluded from the traditional measure of inflation. Now maybe that is because of the way the government has been distributing all this excess cash. If over the last 10 years the focus had been to to get the money to the public rather than work through the banking system, maybe these excess dollars would be showing up in the economy as inflation.

The other issue I have with this (as does the author of these points apparently) is item #4. The assumption is that when inflation does arrive, the government will raise taxes to slow the economy. I find that uh.. very unlikely – as there will be no political will to do so, especially when workers are seeing their paychecks erode during inflationary periods. Unless of course the taxes are raised on financial assets and investments – and we know there is no political will to do that. We can even look so far as the latest CBO Budget estimate to see there is no projection to deal with budget deficits through 2030:

Perhaps the assumption is there will be no inflation for the next 10 years – in that case – the good times are here.

Nobody knows how this will ultimately play out. if no inflation does occur in the next few decades, I will have to admit the Modern monetary theorists were probably right. If we do start to see inflation, and see rising interest rates increase the debt service in our annual budget, I will be interested to see if the Modern Monetary Theorists stick to the plan when it becomes politically difficult.

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June 18, 2020 Dan Leave a comment

The Deficit, Repo Markets, and the Stock Market.

One of the most under-reported economic stories of 2019 was the problems with the Repo Market and ‘Not QE’.  This article does as good as job of any as explaining whats going on.  This is a complicated topic, which is why it hasn’t been covered outside of the financial press, but it seems to me this will have huge implications in the coming years.

Starting in October, largely due to all the government securities being issues, the Fed stepped in and became a net buyer of Treasury securities. Wall Street & the banks treat treasury securities like liquid assets – the problem now being there are so many treasury securities in the market, the appetite is dwindling. Banks are stuffed with treasury securities, foreign interest is stalled. It seems everyone who wants to own a treasury bill has one.

Prior to this, starting in late 2017, the Fed had been (slowly) trying to drain off all the debt it added over the last 10 years. One could argue this was a major factor in the stock market ending down in 2018, with its low in December when the Fed raised rates, and signaled more to come in 2019. In January, the Fed reversed course and signaled lower rates, juicing the stock market to new highs. Now that the Federal Reserve is keeping rates low, they added fuel to the fire by injecting (printing) more money into the system, which has the effect of ending up in the stock market directly. It would seem this is what might be fueling the recent highs in the market.

Another longer term ticking time bomb is all the retirement assets accumulated by baby boomers. As boomers quit accumulating wealth (or die), and they become net sellers of financial assets, that money will be passed back into the economy, flooding the economy with all these T-bills that have been hoarded in these retirement funds. I think this may finally lead to the inflation that has been long predicted by economists when government runs large deficits. Once that money leaves the hands of old savers, and into younger spenders, a lot more money will be chasing the same goods which is a recipe for inflation.

Historical economic theory would assume that rising federal debt would lead to higher interest rates, as supply of debt exceeds demand. So far that hasn’t happened. I think this has been distorted by the huge Baby Boomer appetite for savings, and recent Fed policy is distorting markets by ‘hiding’ this debt on the balance sheet. And because it appears to the public and politicians that ‘deficits don’t matter’, there is no appetite to reign in all the federal debt. So far, its working. But I believe deficits do matter. How long the government can continue to print paper to cover these debts is anybody’s guess. At some point one can assume markets will care? And what will happen when markets do care? That is a question that will be have to be answered sooner or later.

January 28, 2020 Dan Leave a comment

Billionaire Philanthropy

The recent 2020 campaign discussions on billionaire taxation are bringing about an interesting discourse, but I wish someone would bring up problems with current philanthropy rules. It seems to me an easy step for someone to take would be to tighten the loopholes of big charitable giving.

This article does a great job discussing The Perils of Billionairre Philanthropy. It seems to me that charitable giving has surreptitiously become primarily a tax avoidance tool for the wealthy. A great stat from this article:

In the early 2000s, households earning $200,000 or more made 30 percent of all charitable deductions. By 2017, this high-earner group accounted for 52 percent of donations. And the total share of charitable deductions from households making over $1 million dollars grew from 12 percent in 1995 to 30 percent in 2015, according to IRS data.

Why the change? A couple reasons in my opinion.

  1. Donation of appreciated stock. A hidden gem of tax avoidance for anybody who has stock that has greatly appreciated. When you donate stock to charity, you get to take the charitable donation credit on the full value of the stock, without taking the capital gain. A couple great examples here. Bill Gates donated $4.6 billion dollars of stock to his foundation in 2017 without paying any capital gains. Lets assume his cost basis on that stock is near zero, and he is in the tax bracket that would pay 20% capital gains tax. By doing this, he was able to avoid paying roughly $920 million in capital gains in 2017. In 2018, Warren Buffet donated 3.6 billion in stock to the Bill and Melinda Gates foundation. Using the same math, I count that as $520 million avoided in capital gains taxes. That’s $1.5 billion in lost taxes in these two examples alone. Yes the money goes to philanthropic ventures, but is that equitable? Now.. it is a pain to donate stock to charity.. which leads me to #2.
  2. The rise in Donor Advised Funds. Donor advised funds are a great tool to give to charity for the wealthy (and upper middle class) to get a tax break. The game here is instead of giving directly to charity every year, every few years to give a lump sum to a Donor advised fund, which is essentially a pool of charitable money that can then be distributed to a different charity at any time. By giving a lump sum, people who do not hit the threshhold for itemizing their taxes can now get a charitable tax break. An Example: Lets say a married couple earns $16000 in taxes, and gave $3000 in charitable gifts in a year. Given the standard deduction is over $20k it makes sense to just take the standard deduction and not take itemized deductions, thus losing your charitable deduction. However, if instead of giving $3k to charity every year, you give $15000 to a Donor advised fund every 5 years. This gives you a $12,000 write-off every 5 years for charitable contributions because you can itemize that lump sum every 5 years. The kicker of course is, if you have appreciated stock, you can contribute your appreciated stock (see #1 above) to the fund to further leverage your contribution and take advantage of tax rules. Then, thoughout the year you dole out your money to your favorite charities from your balance in your Donor Advised Fund. These funds are very easy to set up and use – but how many people can take advantage of them?

It occurred to me that companies that have a 401k must follow strict IRS guidelines to ensure their plan is equitable by ensuring employees participate from all income levels. These charitable donation loopholes have been around for years, so they likely have bipartisan support because they encourage charitable giving. But how hard would it be to look at the above issues to make them equitable? Either change the rules to either cap tax free contributions, or change the rules so people from all income levels can take advantage of these tools.

November 9, 2019 Dan Leave a comment

Mexico Looks To Go Left

Haven’t seen a lot of news here in the US on this, but Mexico is holding a on July 1st and the candidate who has a big lead is Andre’s Manual Lopez Obrador (AMLO), of the left wing MORENA party.  AMLO’s populist base is mostly rural, with familiar populist messages, looking to continue the worldwide shift towards ‘change’ in government.

As per Wikipedia:

Anaya promised to investigate and do everything to make sure President Peña Nieto is sent to jail for his aforementioned multiple presidential scandals, with López Obrador agreeing and suggesting to up the ante by also investigating every living former president.

On 26 January, López Obrador accused the International Monetary Fund of being accomplices of corruption in Mexican politics and claimed that its policies are in part responsible for poverty, unemployment, and violence in the country. López Obrador promised that if he wins the presidency, Mexico will follow “its own agenda.”  López Obrador called for a change in security strategy and offered the controversial proposal of giving amnesty for drug dealers as a way to combat the drug cartels.

Speaking out against national  powers and world institutions seems to be working, as AMLO currently has over a ten point lead in the polls.    Mexico’s billionaire class also looks to be concerned about this.  Forbes had an interesting overview of this, including this quote:

A number of major firms, including mining giant Grupo Mexico, which is owned by the billionaire Larrea family, luxury store chain Palacio de Hierro, which is owned by the billionaire Bailleres family, and supermarket chain Grupo Comercial Chedraui, which is owned by another one of Mexico’s wealthiest families, have reportedly required employees to attend presentations or read materials designed to warn them of the  implications of an AMLO victory.

Mexico is the 15th Largest economy in the world, so a switch to a populist government would have to have worldwide implications.  So naturally there are allegations of election tampering by both the United States and Russia.  So keep an eye on this election – if AMLO wins, my guess is this may be the next big thing the world is talks about.

 

June 22, 2018 Dan Leave a comment

About Last Night..

As an avid reader of history, and a follower of the US political scene –  I have to rank last nights election of Donald Trump to the presidency as one of the most astonishing national events that I have witnessed.  Much will be written in the next days/months/years/decades about how this came about, so I may not have any unique insight, but I thought it would be worth recording my initial impression.

The fact that the winning candidate himself was so flawed is perhaps not the biggest political wonder.  Not to mention a popular incumbent Democrat, a 4.9% unemployment rate, and little inflation.  A Republican party which in large part refused to endorse their candidate, waiting for him to go away, is now running the show.  This defies all conventional thinking.  This also results in the huge power vacuum that was in the Republican party to make its way to the White House.  Nobody knows what to expect or who the power players will ultimately be – for that matter nobody really knows what Donald Trump stands for.  The Democratic opposition is temporarily shattered, decapitated overnight.  Trump’s policy predictions were necessarily incoherent to get him elected.  Nobody even knows if he wants the job of President.

Long term, the big takeaway from me is how nationalism is gaining momentum in the US and in most developed economies.  I think people did not vote for Donald Trump, they voted against the status quo and the elites, a vote driven by the growing wealth inequality.  Call it the ‘revenge of the flyover states’ – but the booming high tech wages and increasingly large Wall street profits caused this as much as any of the politicians messages.

This proves Brexit was not an anomaly – too me this election has the same signature as the Brexit – the middle class taking control and voting for change regardless of what the power elite recommend.  I would expect more nationalist and rightwing votes to happen in Europe, and possibly Japan.  Should this trend continue, I have little optimism for the world economy and the hope of world peace.

After writing this post, but before publishing it,  I ran across Glenn Greenwald’s post also supporting this theory.  It’s a great read to help try to make sense of this.

Shorter term, I look for a recession within the next year.  Nothing to do with whatever policies might arise out of the new administration, more due to the massive uncertainty in the next few months.  This has to put a lot of capital spending (across the world) on hold as corporations wait and see who fills the power vacuum.  Early reports are the widely expected December rate hike is off the table- if so, that shows the Fed is already going on the defensive.  I can’t see how this will not slow the the world economy.

The Obama administration came in on the slogan of ‘Hope and Change’, and in some ways he delivered on the promise.  Now perhaps the slogan should be changed to ‘Fear and Hope’,  as we perhaps need to fear the anger demonstrated by the middle class with this vote, and hope that this administration can surprise us and help build a better world.

November 9, 2016 Dan Leave a comment

The Government Costanza Moment

When I read these two articles, I was reminded of the Seinfeld episode where George realized that he has been making bad choices all his life – so he should do the opposite of what he thinks is right.

Case in point:  This article discussing how the budget deficit is now increasing due to stimulus points how how the government has been making bad choices.

The uptick, which had been projected last winter by government analysts, largely reflected the revenue loss from expiring tax breaks for businesses and individuals that Congress extended in December.

Wait a minute..  I thought lower taxes were supposed to trickle down and result in increased tax receipts – how could that happen?  And all you Keynesian government economists out there – what are you thinking?  We are supposed to stimulate the economy with deficit spending during downturns, and recapture that excessive spending during the good times.  Are these not good times?  How low to employment rates need to go before we are in good times?  If not now,  when?

Just like George – I think they need to rethink their choices.

Now lets move onto the Fed.  Now, the thinking is,  maybe low rates are hurting the economy!

In the minutes for the central bank’s Federal Open Markets Committee September meeting, several higher-ups at the Fed hinted that the policy of historically low interest rates was doing more harm than good to the economy.

After several years of keeping rates at or near zero to grow the economy – they now wonder if low rates are stifling growth?  Perhaps their models did not take into account the huge demographic of baby boomers who are trying to save for retirement are getting no interest income, causing them to try to save more and not stimulate the economy.  Well, at least now they are thinking about it.

I think the next step is to take a page out of the Costanza playbook.

 

October 26, 2016 Dan Leave a comment

Another Historical Bush Family Tidbit

For all the internet has brought is in the last 20 years, perhaps overlooked the most is how much media has changed.  Pre-Internet – news was provided by the Big 3 Networks and your local newspapers or weekly periodicals.  Now you have thousands of sources of news, anybody can publish (for better or worse) info that would never make the news outlets.

I thought of this when I ran across this article written by Russ Baker – exposing a little known angle on the assassination attempt on Ronald Reagan by John W. Hinkley.

One could easily file this under one of the many internet conspiracies out there, but the information contained in Russ Baker’s article is at least eyebrow raising when you look other Bush family political  lore.  Who knew there was a relationship between the Hinkleys and the Bush’s,  and you would think it would of at least been discussed more indepth than the minor references printed in the news coverage of the day.

Russ mentioned that he left this story out of his book on the Bush family, fearing the book would be seen as a collection of conspiracy theories.  So perhaps his website is the best place for this information – maybe not really ‘history’, but worth a special note.

How many previous historical documents have left out fringe stories or things feared to hurt the sales of books?

Historians have always had the tough job of piecing together a narrative based on fragments collected from documents, interviews, or news reporting of the day.  It will be interesting to see if future historians are able to build a ‘more accurate’ history, as the volume of information on the internet should provide a huge increase in documentation and multiple facets of events and people.  The future of history should soon be upon us.

 

 

 

 

September 29, 2016 Dan Leave a comment

The Bombing Of Libya

It’s been awhile since I have had a US foreign policy rant, so I figured it was probably time.  While the US populace has been distracted by the US Election Show, the administration took the opportunity to expand our militaristic role in the Middle East.

The US started bombing ISIS in Libya last week, apparently because our litany of bombing other countries has been so successful – or perhaps we are running out of targets in those countries.  This time there is a twist, as we are bombing targets at behest of the interim government – so we are acting as hired guns to officially do the worlds dirty work.

Why is this story so under-reported?   Are Americans numb to the mess that is American Middle East foreign policy?  According to Pentagon spokesman Peter Cook, the strikes did not have “an end point at this particular moment in time”.

So this is a new front against the ever expanding battle against ISIS.  And there is no end in sight.  And don’t look for anything to change under a new Democratic or Republican administration.

But wait a minute – I have to cut this post short – Donald Trump just tweeted something that has all the news networks giving him 7×24 coverage… so I gotta go and watch whats really important.

August 7, 2016 Dan Leave a comment

An alternative view of Russia and the CIA

A surprising frank interview with Ray McGovern – an ex CIA Analyst who appears to be spilling the beans on the ‘Deep State’ running American foreign policy:

http://www.salon.com/2016/02/07/intelligent_people_know_that_the_empire_is_on_the_downhill_a_veteran_cia_agent_spills_the_goods_on_the_deep_state_and_our_foreign_policy_nightmares/

The first half of this article is marginally interesting but provides some historical perspective – but the 2nd half picks up speed when discussing Ukraine, Syria and the ‘Deep State’.

Looking at Ray McGovern’s bio on Wikipedia shows that he was “a CIA analyst for 27 years (1963 to 1990), “routinely presenting the morning intelligence briefings at the White House” and “where he was responsible for the analysis of Soviet policy in Vietnam”.

He is clearly a student of Russian history, and maybe he could be biased towards the Russian point of view (And the interview took place while he was attending a global political conference sponsored by RT (Russia Today).

Having said that – even if the truth about American foreign policy is ‘somewhere in the middle’ of his version and the Russia/Putin perception propagated by American media, its a pretty scary revelation about how far out of control the CIA is.

This is perhaps the most damning article I have seen on the CIA from a pseudo – main-stream news source (Salon is rated the 38th most popular News Entity in January 2015 by unique visits).   If only more news sites would expose this kind of information.

PS.  the article references the leaked discussion between Victoria Nuland and Geoff Pyatt regarding the American strategy in the Ukrainian coup – this article has the transcript and analysis of the call providing more great insight into how foreign policy works.

February 20, 2016 Dan Leave a comment

The US Bomb Shortage

A quick rant – though I know this article is over a month old.

The latest foreign policy dilemma America is facing:

Air Force burning through bomb stockpiles striking ISIL

One would think this article is from the satirical site The Onion – but this is a serious new piece.   This quote from the article shows the emergency America is facing:

The Air Force has fired more than 20,000 missiles and bombs in the air war against the Islamic State, depleting its stocks of munitions and prompting the service to scour depots around the world for more weapons and to find money to buy them, according to records obtained by USA TODAY.

Wow – I guess we should throw a few more billion at the military budget.

usmilitaryspending

But wait – lets see how effective this campaign is:

USA TODAY reported earlier this week that Army Gen. Lloyd Austin, who oversees U.S. military activities in the Middle East, estimated that the air war has killed 23,000 ISIL fighters, raising the death toll by 3,000 in just over a month. However, the movement continues to recruit replacements, and the Pentagon does not release its estimates of the war dead.

Lets see… 20,000 bombs, and we have killed 23,000 ISIL fighters – yet the movement continues to recruit replacements.  So effectively once could calculate easily that each bomb produces under 1 enemy casualty (lets assume that for each casualty we recruit .5 replacements) – no statistic on how many innocent people are killed.

This is really our best strategy?  But hey – what else should we do with American tax dollars – its not like we need to save money or anything.

 

 

 

January 12, 2016 Dan Leave a comment

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