From the Hinterlands

        3 November 2014


        Your recent correspondence has been most welcome. Thanks for writing. Sorry to read about the decline of your religious convictions. As you mentioned, this is something that most people in their lifetimes will go through. Some will come through such a trial with stronger leanings, others dropping matters all together. Some will linger in the grey of agnosticism, telling themselves “just in case, maybe.” We are in agreement, certainly, regarding the role of religion in past and present conflicts. Disastrous. One wonders were there not religion, if one can imagine such a state, would the world get along through commerce? Or, would conflict mount through differing economic, social or philosophic ideologies as has also been an historical tendency. Some argue religion (ie, the Ten Commandments) is order. Can there be order without religion? Can states act in the world as self governing hegemonic entities without religion? I hear you Tetraneuris, “But Periwinkle, states already do…” Perhaps, but look a little deeper, that is into their bedrock foundations and this becomes less absolute. Economics does not appear to trump religion in many cases/regions. The fact is, it’s remarkable what the fear of death and the uncertainty thereafter can achieve. I appreciate your struggle and I reckon, your being a Bonhoeffer fan, you might revisit his Letters from Prison. You also might allow a little more time for further study regarding how religion appears to be destroying civilization, which it very well may be. Fanatics are after all fanatical. I always wondered though how one with such libertarian leanings could also hold to what I construed to be a fairly traditionalist faith. By the way, I certainly appreciated the inner compass bit and have experienced times where I had to buck the crowd feeling others may have been off track. Stick with humility, Tetraneuris. This you know.
        So, I see they got a little snow up north on this election eve. I also noted Boston lost one of its long time mayors. So, how do you think things will pan out tomorrow? I had a conversation with family recently that went something like, “What difference does it make how things go tomorrow? The folks getting elected from the two parties are each culpable spendthrifts. Both also subject to the same interventionist tendencies. Borrow away, we’re good for it types. Today is relevant, tomorrow after all is not today. If it’s a Donkey or an Elephant, it matters not. President Obama was elected with a certain set of expectations from his contemporary liberal constituents who were forced to watch their man yield to the global security apparatus. This is not what the framers intended.” I’m sure you can imagine with whom I had this discussion…
        I will say though that tomorrow may be the first election day I do not visit a booth. I’m not sure how the country gets itself out of the present vicious cycle we appear to be in politically, unable to manage the country as sensible adults. It’s going to take a crisis like event most likely. This is unfortunate but has been covered in the academic journals as well by respected individuals. Speaking of crisis, you’ve probably noted that deflation is quite prevalent in the headlines lately. Why would this be? Has someone finally awoken to the reality of the situation? You have to love the policy wonks in Europe and America telling the Germans they should borrow at close to negative interest and invest in their infrastructure in order to stimulate the economy – create demand. “Can’t beat those rates!” they must be thinking. Keynes did make the most recent cover of Business Week. Of course, the German Ten Year yield is low for a reason. I’m not sure the Euro experiment is going to survive, Tetraneuris. We’ve already discussed this, I realize, attributing its future faltering to cultural issues. Can you imagine financially reckless states directing economically healthier countries to become more indebted themselves in order to “create” regional demand through government expenditures? Think about this for a moment… If the Germans continue to resist and question the legality of Euro QE, can one really question their stance? Perhaps in their minds remain thoughts of something like (first) heavy indebtedness, (second) CB lending/government spending and (lastly) wheelbarrows filled with Marks.
        The US has been somewhat fortunate given the resilience of its “consumers.” However, the country is quite probably going to find itself in the same situation as Japan and Europe, unfortunately. This may indeed be the case with China as well, though given the honest lack of transparency there, one does not know what is truly under the surface regarding debt levels (for individuals, regional governments and the main government itself). The macro education is unfolding, nonetheless. The Japanese are amping their monetary experiment with further currency devaluation. You probably caught the latest announcement. This is hard to watch, honestly, knowing the probable outcome. Catch the greenback lately? Good for oil, bad for the exporters as you know. Its strength testament to the credo “all things are relative…” It’s difficult for heavily indebted states to artificially create demand through government programs when it means more borrowing. Given rates are low around the world, in the short term governments may continue to borrow at low rates; however, Mr. Market will eventually have his say. The only way I see countries getting out of this scenario is through time. Countries need to incentivize business creation. Truly do so. “If you start a new business today in XYZ Global City (of your choice), your company will pay no income taxes at any level for a decade.” Make no mistake, this is a global debt crisis and trade matters immensely. If firms hire people in Frankfurt, Tokyo or Boston it helps the world’s economic picture. The country wants to deal with so called inversions? Lower or eliminate corporate income taxes. Incentivize firms to invest and produce at home, finding buyers for their wares. This of course does not put money directly into the pockets of “consumers,” but it might stabilize the wage picture if business people find a way to take advantage of such a scenario. Wages improve, people spend. Wages improve, government coffers improve as well. Government spending got us in this crisis in the first place. Today we are suffering partly from the ill side effects of the New Deal and the Great Society. Half of the US Budget goes to entitlement expenditures. Europe and Japan have the same issues. China has a demographic issue as well. Unsustainable socialism. The Austrians (Hayek, Mises have it, Tetraneuris. Experience teaches. Perhaps the above is too gloomy?
        Imagine how much simpler the immigration issues would be if countries did not have elaborate welfare states? “Sure, please come here! But, you’ll have to work. We need you and your offspring to help pay taxes to help pay down our obligations. Why you might even help our state get out of its unfunded pensions situation if you live here, are a good citizen and pay state taxes.” All of the squabbles pertaining to the matters going on in Europe at the moment would be greatly lessened. But the reality is that politicians would rather go in the opposite direction where there is less pain and risk of not getting reelected. Cater to the unions and those living off of over generous welfare states. For further political absurdity, note, for example, that today some politicians want to reinvigorate Freddie Mac and Fannie Mae, lowering lending standards again with low or no downs and precarious D/Y ratios, putting the burden once more on the tax payer. What has it been since the collapse, five years? Remarkable. It seems to me to be healthy that individuals are renting again. Perhaps there will be more rental development given this trend. Thrift matters, Tetraneuris. Remember Franklin? If a couple desires a home, save for a while, then put 15 or 20 percent down and buy a home. Trends such as these cause one to not go to the booth. One may as well sit back and allow nature to take her course. “But maybe your man will change things, Periwinkle!” I hear you saying as you read this. Improbable, Tetraneuris.
        The great risk in all of this, of course, is what will be the end result should their be a dark unwinding? What will the people say? How will the people behave? The unemployed shop worker, the teacher whose pension didn’t make it, the guy delivering pizzas, the bankers, dentists and everyone in between. Indebted college grads, so forth. How will the people behave? I can hear it now, “The government has failed us! Capitalism has failed us!” Capitalism of course did not fail anyone. Capitalism is not what created the expansive government programs that are drowning us today. Look at the origins of the country’s present morass and it will lead you to government – federal, state and local. Where are most of the pension and benefit problems? How did the housing crisis develop? What of the role of wars and their expenditures? I am discussing the public realm, Tetraneuris. Government functions as the bureaucracy it is, not as a private individual would behave in the allocation of his or her resources. Or, as shareholders might behave regarding the investment of their hard earned resources. The tough part of this is that generations have grown up expecting government to be a provider. Perhaps capitalism to these individuals (small c… should be social…) means an income for life with COLA adjustments, subsidies for their farm, medical payments for that hip replacement, relocating the FBI building to their state, low or no interest loans for a home or college, grants to their university department for studying bees, and so forth… Thus, what will the reaction be of these individuals who suddenly have to become self-reliant again or perhaps for the first time? A natural expunging of government excesses nonetheless would over time mean a healthy return to proper financial mores. Businesses should do the borrowing and hiring, not governments. Further, low regulatory environments are paramount as well. The US has not operated in a laissez faire sense. It most likely never will. Were the government not so intrenched in the housing industry with its backstop, the banks most likely would not have gotten into the quagmire they did. Bonds would have been rated accordingly and not as gilt edge. Granted the gunslingers may have taken swings with their owners capital in other areas, but matters most likely would not of panned out the way they did had Uncle Sam not been in the picture. Now look what’s happened! Uncle Sam and the International Bodies have delved further into markets, attempting to regulate the ungovernable.
        Given the above, it may be better to unwind the inefficiencies gradually. I’d keep Keynes out of the equation, though. I realize the demand issue, but stick with the time theme. Low rates are allowing governments and individuals to refi and experience relief in that regard. Commodities are off helping the suffering pensioners. Policy makers should pay down debt, mandate bumped up pension contributions, phase out many of the government’s programs, and accept that this will mean elevated levels of unemployment until displaced folks find occupations in the private sector or with the non-profits. Granted this will hinder the wage recovery, but it may well be that that ship has sailed regardless or at least until things rebalance. Policy makers still have the ability in the US to gradually phase in such austerity measures. Politicians, though, appear to desire maintaining the status quo. And, after all, this may reflect the sentiments of their constituents. Should that be the case, which is to say should the electorate not see the writing on the wall, then matters may have to take the natural course. It may be the case that as Japan and parts of Europe contract (a large slice of the global GDP) other states on the edge of the whirlpool -there are many- go for a dip as well.
        One last consideration is the fact that policy makers are likely to learn the hard way this go ‘round that war, immense government spending and borrowing, is not going to resolve present economic ailments. We are already borrowing one half trillion dollars per year (deficit spending) and the Central Bank owns four and one half trillion dollars worth of our securities. The present level of indebtedness means additional borrowing may be unfeasible. The current state of the global economy will make raising taxes for additional revenues likewise a poor decision. Although, like you, I think a consumption tax would be an appropriate way to raise revenues to pay down debt and perhaps incentivize one to sock a little away, both pluses if the economy could withstand it.

Hoping to hear from you again shortly, I remain

        Very Truly Yours,


PS. By the way, I’m now working my way through Daniel H. Rosen’s “Avoiding the Blind Alley ~ China’s Economic Overhaul and Its Global Implications” which he put together for the Asia Society with the Rhodium folks. This is an interesting read, noting the directional shifts occurring in China as outlined in the recent Third Plenum’s Decisions policy directive. Their reliance on state-owned enterprises (SOEs) appears headed for a change. This will be interesting to watch unfold. There’s too much to go over here, but we’ll have to touch on it down the road. It’s a lengthy work. Clearly China has its own issues pertaining to real estate, SOE driven excess capacity, debt and demographics. The same whirlpool’s edge.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s