Think for a moment how huge stores of sand -- silicon -- changed from almost worthless to immensely valuable when someone got the idea to borrow a considerable amount to transform it into silicon computer chips. It wasn't his money which did it, it was borrowed. It wasn't even his sand, and it quickly became worthless again when someone else put it to more desirable use. According to our standards, the inventor became a billionaire for making this contribution to society, and when he died other people got to spend money they never earned. (Actually, it was many innovators cooperating.) That's our system, and anybody else is free to try to imitate it. Its main justification is that millions of other people got jobs or even wealthy because he risked bankruptcy and they didn't.
The same simple process gave us general prosperity when lots of people did it; many succeeded and some failed. Some succeeded, but made atom bombs; some succeeded and made addicting opiates. Some watched the general process and surmised, in a century we can realistically expect the rest of the six or seven billion on Earth to become involved in a race to eliminate poverty worldwide before others blow us all up. Because, although we have achieved a lot quickly, some will still live and die in poverty, because we didn't achieve it soon enough. Give us some of it, or we will blow you up. Must we give it all?
There are other ways to summarize the economic world, and they could easily triumph. The pirates may enslave the producers, for whatever purpose they have not explained. The have-nots may outvote the haves, causing us to choose falsely between sympathy and democracy. The people who inherited warlike genes may enslave the people who inherited innovative genes, particularly if the non-innovators also inherited genes to persuade with false arguments. Or the innovators may have inherited the Crusader mentality of Convert or Die. But praise of greed may lead to the triumph of greed, and we may agree to a false premise. A false premise that we must choose between becoming the enemy and defeating the enemy, using logic when we need to use self-interest. As the athletic aristocrat George Washington reminded us: Only if you are strong, will other people leave you alone.
Three decades ago, before a lot of New Jersey voters were even born, the so-called Mt. Laurel decision ordered the state to distribute money to woefully underperforming school districts to give the kids a fair chance in life. But now, thirty years later, the money routinely goes to ten or twelve school districts, and the other five hundred are suffering from high taxes. The voters in the five hundred districts are angry and want some of their tax money to stay at home. But by any fair appraisal, the schools in the Abbott Districts are still deplorable, and a great many children are growing up without an educational chance in modern life. Both sides have a legitimate point, and neither will budge.
But now there arises an entirely different way of looking at the mess. Maybe money isn't the point, but education is the point. The purpose of the Abbott District money was not to give money fairly or unfairly. The purpose of the money was to educate children, so at least they wouldn't grow up to a life of poverty and crime. In a sense, it doesn't much matter how unfairly the money is distributed, just so the kids get an education. Do they?
Frankly, it doesn't look as though they do. After thirty years, it is not hard-hearted to say the burden of proof is on those who say the money did some good. The very least that everyone ought to agree on is to perform a library search for other ideas, like charter schools, and report to a Legislative committee, followed by taking testimony from places with experience with other ideas. Because the real issue is not, how long we go on spending this money. It is, or ought to be, how long must the kids wait before something better is given a chance?
These are not easy issues. Our forebears didn't do such a wonderful job with assimilating the American Indians, but surely we can do better than that. With this horrible example before us, we cannot really expect the problem to solve itself. Nor is it a purely local problem; plenty of big cities have the same issue in a slightly different form. How are charter schools doing, for example? I have every confidence that if the local Camden County community, or even the whole State of New Jersey, could show some important progress -- money would come pouring in to help a winning project. But to keep on with the same old ideas is going to get you the same old results.
Child hood
Tastes good
Mom cooked
Dad looked
Each meal
Stays real
Stays part
Ones heart
When wed
Food fed
His growl
Claims foul
Hew threat
Safe bet
Ends shout
Eat out
FEDERAL RESERVE, BOND MARKETS, AND THE ECONOMY--How to control them.
INFLATION BUST MARKETS and ECONOMIES
INFLATION BUST
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Ratio of Stocks to Bonds
Monetarism {Friedman}===========[periods of relative stability}================Keynseanism {Phillips Curve}==========================
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Stocks drop
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Sell bonds stagflation
Discourage hiring.
Sell bonds, buy stocks
Buy stocks Make hiring expensive.
============================={Crash}=====================Sell stocks, bonds when you can===>
Buy and sell lots of them. =============
Stuart A. Hoffman, chief economist of PNC bank:
National Debt: 10 Trillion when Obama took office, 18 Trillion in 2015, of which 6 Trillion is owed to ourselves (Medicare trust funds, etc). GDP 18 trillion.
2015 will be a recovery year in America, a puzzle in the rest of the world. The US has comparatively small trade, should not affect the rest of world, much. House prices, wages, employment should improve, some short-term interest rates will be announced by FED as symbolic.
But after 2016, the future is less promising: education, medical care, especially ominous. Oil is what saved us. But it's bad for Canada and Mexico. The Swiss pegged their currency to Euro, which they did not join. When Euro promised bond-buying (QE3), the Swiss exporters rebelled, forcing an end to peg, so Swiss franc soared. Too small to affect the world, Switzerland might still have an effect influencing Germany to follow the same pattern, possibly followed by England.
Viewed from the other end of 2015, was he right?
Government programs tend to have a "one size fits all" quality, growing in part from the Constitutional requirement for equal justice under the law. Most of them make no mention of what to do with left-over funds, usually implying they return excesses to the pool for recycling. Supposedly that reduces the cost for everyone else. Sometimes, of course, it raises employee salaries, buys battleships, or is otherwise spent for things we didn't specify. A much better default rule would be to return unspecified excesses to the original contributor, as an incentive to keep his spending lean and mean. But that's someone else's Crusade; we just urge it to be examined each time the matter arises.
The cookie-cutter similarity is exaggerated by the way legislation is created. Each Congressman represents nearly a million constituents, far too many to be running for re-election every two years with scant time left to legislate. The laws are consequently too general, are revisited too infrequently, and leave too much to the Judicial branch and the administrative agencies to settle. Congress increasingly resembles a Board of Directors, rather than the source of legislation, ultimately lacking the power to control the President by picking him. For this reason, we hear the British parliamentary system praised since the Prime Minister is chosen by the ruling party. My own feeling is Congressmen are not able to devote enough time to the job of legislating mainly because they spend so much time in the telephone call center, soliciting election funds within the hearing of their leadership. The deluge of business is ultimately the balance point of leverage in the system. Let's examine some issues which are not urgent, but eventually must be settled by these harried law-makers.
We have stumbled onto the clear linkage between paying for healthcare, and subsequently being forced to pay for the resulting extended retirement, which is an unexpected but inevitable consequence of improving health care. Although the cost of healthcare has been a national concern, extended longevity proves to be potentially even more expensive, expressed as a lump sum at age 65. That's because a completed retirement fund becomes a constantly shrinking asset once you retire, whereas Medicare is only spent when you get sick. Furthermore, retirement will soon last a third of a lifetime (or more), so it is awkward to suggest a defined price for it. Everyone, even someone who is quite rich, is afraid to spend retirement funds for fear of running out of money during a particularly expensive terminal episode, like some of the cancer treatments now making an appearance. Homogeneous nations like the Scandinavians seem willing to carry equal retirement to a national level, for approximately the same reason socialism is more popular there. A homogeneous people are more willing to trust each other to "re-insure" the whole population in unpredictable circumstances. But our society seems headed in the opposite direction of diversity. These are not parallel goals.
Socialism is mainly unpopular in America if carried beyond issues of mere subsistence, because of its tendency to reduce work incentives. So it's a circular argument usually growing out of famines and genocides. For example, raising the retirement age might ease financial strains, but instead many people just want to quit work at age fifty, while others see no reason to retire at all. Unfortunately, workaholics resent the suggestion their extra income should support others who prefer to quit work. The difficulty is magnified by first supporting thirty million people who are plainly unable to work, plus at least an equal number who hate the kind of work they do. The outcome is a diverse nation seemingly resistant to government protections which guarantee more than bare survival, in constant contention with a subpopulation which yearns for education during the first third of their lives, and another subpopulation which yearns for expensive leisure during the last third of their lives.
If that's a fair analysis, there will always be a divergence in luxury for retirements, and therefore a constant propaganda war between fairness to the poor and fairness to their more visibly successful competitors. The term "Social Darwinism" captures that flavor. At least for a long time to come, the amount available for individual pensions at retirement age will be a scorecard for a successful life. Both public boasting and envious criticism should, therefore, be discouraged, but the lifelong incentive to be frugal cannot be ignored. If we can manage this paradox, the incentive can be used as a silent reminder that what you frittered away as a youth, might have been used to improve your retirement. At the very least, the public might be reminded government debt lowers long-term interest rates, intentionally lowered in order to stimulate short-term growth of the economy. But to paraphrase John Keynes, "In the long run, we are all retired." Eventually, we must all live on what we saved, and debts we agreed to must be repaid. What we now seem to have, are incentives to retire early, and incentives for the government to inflate away the cost by suppressing interest rates.
One logical place to begin is to pay a bounty into an HRSA for subnormal spending during the previous year
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Therefore, if unifying the finances of medical care and retirement at any age, is an incentive to be medically frugal, why not unify the incentives for all things medical? Otherwise, the landmark moment becomes the termination of your present means of support, the termination of your present mortgage, or graduation from your present school. There is general agreement, medical costs have risen so fast because there is nothing else to spend earmarked medical money on, except frivolous medical care. As we said earlier in the book, there is the reason to suppose the success of Health Savings Accounts lies in the powerful incentive provided by retirement needs, offered as use for left-overs from healthcare. The roll-over of an HSA into an IRA provides an alternative, and the tax deduction for the health of an HSA provides a preferred, but not mandatory, outlet.
If, one by one, other funding sources for healthcare flow into an HSA, healthcare at all ages are provided with a unified incentive to be frugal. Health insurance of one form or another may resist the HSA alternative, but if we are correct, the market will force it. Because medical care seems destined to concentrate among elderly people, it seems urgent to provide this incentive to Medicare first. Of all places, Medicare is the least desirable place to be employing deficit financing, pay-as-you-go financing, or other mechanisms to make it appear to be less expensive than it is. Medicare is where serious expensive disease concentrates, and that trend continues. Because of stretched finances, one logical place to begin is to pay a bounty into an HSA for subnormal spending during the previous year. The compound-interest beauty of this approach is the younger you do it, the more it will help; and so that idea might be built into it, too.
Flexibility is also an incentive for almost any program. We have mentioned several ways to enhance Medicare's revenue and there seems no reason to limit the choices. The transition from Medicare as we know it is likely to be a long one and family circumstances may change several times during the phase-in. If the individual could contribute to the contingency fund, or to the Last Year of Life fund, make choices for increased benefits for late retirement --and flexibility for anything else anyone can suggest, the bookkeeping may become more complicated, but the attractiveness of Medicare improves.
Attention might be paid to the individual's ability to apportion the distribution of his nest-egg at the time of retirement, until the time later on when he writes his last will and testament. There will be an irresistible tendency to overestimate personal retirement needs, in order to avoid exhausting them too soon, and that should be relied upon. On the other hand, these requirements are often abruptly changed by illness, or death of a spouse. There might be several contingency funds, with different rules for invading them. These warnings are issued in full realization most people cannot see so far ahead, and most people will be a long way from achieving their own goals.
With such general ruminations in mind, it seems inadvisable to limit choices without good cause or provide for handling exceptional cases with some sort of required approval. Doing otherwise might lead to forcing some people to reject a job opportunity, or else to buy insurance they do not need. Or to encourage inflation to minimize the unfairness to a surviving spouse, to force reduction of his/her lifestyle. For the first few decades at least, constraining the choices at certain critical points should operate on a sort of common-law or Court of Equity process. As the issues gradually surface, they are slowly resolved. The country grows increasingly restless about the intervention of administrative agencies without adequate oversight by the court system, at the same time, it distrusts the courts. The problem is not so much incompetent courts, as the design of a system dumping decisions on them which might better be made by the individuals. Once more, the problem of too little congressional time surfaces. At present, the tendency to flexibility is to reduce it, and most of the public prefers otherwise.
Marriage Laws. Broken marriages, whether broken by death or design, are too common to justify immobilizing their future direction. A lawyer dominated legislature must recognize the danger of too much power in the hands of the trial bar when dealing with life-long savings of either party to a divorce, or both, or prior expenditures of the couple for health purposes. Or unanticipated contingencies which occur after the separation of a couple. It will be a long time before we have settled what is best to do about serial marriages of homosexuals, or marriages of intersex couples, or no marriages at all. The courts dealing with lifetime health and retirement funds should at least have a defined outlet for the special insights their role provides because the country will need to hear those insights.
Special Treatment of the Handicapped. Not only do handicapped people of all varieties have increased healthcare expenses, but they also have special laws dealing with their problems. These may conflict with what is generally best to do about lifetime health and retirement funds. It is unwise to freeze the rules before the exceptions become evident. Retirement is now commonly thirty years long; relationships can change. Freed of obligations to minor children, they may even change more rapidly.
Expatriate Citizens and Conflicts Between States. It is comparatively common for citizens who were foreign-born, to retire to the nation of their birth because it is cheaper to live there. They become subject to devaluations of the foreign currency and pray to agents who purport to help them, just as residents of different state jurisdictions become subject to conflicting mandates. If the host country abuses them, they present a problem for the State Department.
The list of potential conflicts with flexibility is very long, and these are only examples of it. The basic point is that a mechanism should be created to deal with long term exceptions to laws which envisioned a much shorter horizon and many fewer linkages.
The Ninth Constitutional Amendment restricts federal law to a handful of topics, mainly national defense and taxes -- all other topics are to be covered by state laws. While federalists have always regarded this balance of power as an unwelcome compromise, gradually chipping away at it for two hundred years, state domination of the business of insurance has remained securely under the control of the state insurance commissioner. As John Dickinson predicted, there has been a steady tendency for the laws of the largest state to set the pattern which the others usually follow by reciprocity. In this case, dominance of state insurance laws has gradually shifted from New York to California. As a further consequence, state insurance laws have grown more liberal.
For this reason, state laws generally follow the pattern of limiting insurance portfolios to no more than 25% common stock, although there is no law or constitutional provision that they must do so. The explanation usually offered is that although stocks generally pay higher dividends, a guaranteed bond dividend comes closer to matching the liabilities of insurance that do variable stock dividends. And originally that may have been true, although gradually changes in other things may well have been responsible for maintaining such an apparently bizarre pattern of lobbying for lower dividends for yourself.
Compendia have been produced, showing blue-chip stock dividends (or index funds) have averaged 12% returns for a hundred or more years, while bond returns have averaged 5%. Life expectancy has meanwhile lengthened by nearly thirty years. While there may be legitimate arguments for gradual lowering the limit rather than abruptly doubling it, the consequences of doing something like that are huge. Furthermore, the variability of insurance products defies blanket rules as they once did not, the expansion of life expectancy is as likely in the future as it was in the past, and its unknowable likelihood can be judged as well by one profession as another. Insurance executives have gradually shifted all risk from the company to the customers, and it is time to consider how simple it would be to shift it back. Arguments and risks would also appear for the stockholders of stock index funds as stockholders absorb more of the risk, although the numbers are so large that probably no one would agree to anything but gradual shifts as proof of concept.
An inverted yield curve is considered a warning of financial storms ahead. Here is the negative spread between the 10-year Treasury and the 3-month Treasury. It looks a bit like a barometer warning of an approaching low-pressure front.
"Last Time" means 2006. At that time, the yield curve was inverted but the economy didn't seem so bad. Most of us had an inkling but no real idea of what lay ahead.
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another paragraph
Should anyone invest in stocks? The last decade has been a painful one for dedicated equity investors. In fact, in a reversal of the "normal" risk-return arrangement, the total return on the US Treasury has been substantially better than the return on stocks.
The charts below show the returns to a buy-and-hold investor; a combination of fear-and-greed plus consistently bad advice from their advisors has led most investors to buy at the top and sell at the bottom, making their returns substantially worse.
Just to round out this gloomy picture, it should be noted that these charts show the returns with reinvested dividends; most people spend their dividends and, in any event, the government always taxes them.
Most of the money that has flowed into bad investments with bad timing was not that of the ultimate investors, those who need the cash flow the investments are supposed to generate; rather it was money professionally managed on the investors' behalf, in pension funds, endowments, mutual funds and the like.
It is not so much the stock market that has let investors down, but those who were entrusted with the fiduciary duty to protect the investors' interests. These people get paid no matter what they do and they are insulated from any form of punishment for their bad behavior.
Investors ... individuals, families, colleges, foundations ... all need to take back control of their investments. I can hear it now, something to the effect that this will expose the most vulnerable to thieves and scoundrels and, anyway, investors do not have the education to manage their own investments. But could they really do worse than they have at the hands of those who are supposed to be looking out for their interests now?
Reflecting on the undeniable fact that investors have been ill-served by their advisors is one perspective.
Another is to suggest that perhaps the era of the American economy reigning supreme has ended ... it is certainly the case that we look more and more like Japan post-1989 every day. Perhaps our era began after WWII, 1950, say, and ended just before the real froth got onto to the dot-com bubble, 1998, say.
Perhaps it's inevitable: empires rise and then are supplanted by others ... it's just the natural progression of things.
Or perhaps it's reversible? More/better regulation might be suggested by one group. Less government intrusion would be the cry of another of the warring political camps.
Or maybe it's just cyclical ... look at the middle part of the charts: in 1964 America began a huge expansion of its government spending - war on poverty, etc. - and began a very expensive war: Vietnam. These events dragged the economy down through the 1970s but then we got free of them both and leaped forward.
We are once again seeing huge growth in government spending and we are engaged in two expensive wars. Is it possible that we will suffer for a decade more, go through a Volker-esque catharsis and then leap forward again?
Everyone's got an axe to grind. So best to look after your own knitting and not turn your affairs over to anyone else. Que Sera Sera ... best to be sailing your own boat: chart your course and cancel your subscription to cable news.
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Gold used to be the store of value, and now we increasingly think of stocks and bonds as the sole store of value. But that's just a current manner of speaking because everyone knows we have much larger stores of value locked up in real estate, fine art, and a host of other stores of value. To say nothing of inaccessible deposits of raw materials. The aggregate amount of wealth tied up in unexploited sources is simply unimaginable. The problem is to link it in ways that don't cost too much to exploit.
There's a big uproar about the state giving money to thirteen school districts, but not to the other five hundred. That may be the wrong way to look at the Abbott districts. The question really is: Have the schools improved, after thirty years of this?