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January 30, 2005

Roseannadanna Revisited

We seem to return often to the subject of viral mendacity; perhaps, it's because we know all too up close and personal, the temptation to use words to cover up for unpleasant deeds.  But like moths to a flame, we are once again drawn by the mischievousness of an Administration that never ceases to amaze when it comes to juking around the truth.

No one's forgotten that just a few years ago as we reeled from the attack on the Twin Towers, the just promoted and present Secretary of State provided us with the refrain that the Administration didn't want "the next smoking gun to be a mushroom cloud" over one of our major cities.  When that threat turned out to be just one of a trio of manufactured legs of the WMD argument, the Administration responded: "Never mind, we got rid of Saddam Hussein, didn't we? We stand for freedom and democracy everywhere".

Never mind, that we have put hundreds of thousands of our fellow citizens in extreme  harm's way along with millions of Iraqis. Never mind, that the US's reputation around the world has been permanently stained. Never mind, that the true cost has already surpassed $300 billion, or $10,000 per Iraqi citizen. Never mind, that we have brought our military back to a post-Vietnam low....

Now, with all of the major domestic problems facing us -- from health care to private pensions, to education, to jobs, to historically high domestic and trade deficits -- the President has decided to use up what precious political capital he and his party have gained in the last decades to tinker with the most successful social program the government has ever carried out.  With the dollar teetering on the overhang of a mountain of debt, and Medicare's financial underpinning mushy, Bush decided to call the long-term problem of funding Social Security after 2042 his single most important domestic "crisis".

When the Social Security "crisis" story began to come undone and the revelation that in order to create personal accounts, several trillion -- that's with a "t": BTW, the entire US economy last year totaled out at $10.5 trillion-- additional dollars would have to be pumped into the system in order to make up for the diverted funds the new program would swallow, the Administration began to look for cover.

Never mind, the word crisis, they said, this is a matter of social justice. Social Security is unfair to minorities and immigrants. Poor people die young so therefore the present Social Security system is, they began to argue, racist. By implication, of course, they were arguing that come 2042 poor people will still be dying of bad medical care and inferior diets. so they need personal savings accounts. Paul Krugman, writing in the NY Timess on Friday pointed out that, contrary to the benefit inequity argument, African Americans actually collect their proportional share (and Latinos do even better) through a combination of pension and Social Security disability payments as well as the progressive nature of the way payments are calculated. But Bush will also argue that SS is unfair to young people, banking on the known bias, that young people don't think too much about things that might happen to them, as the Beatle's song goes, "when [they're] 64."

But the  greatest danger of the personal-accounts-in-place-of-the-basic-SS guaranteed pension argument (and we have no problem with programs that subsidize additional private savings accounts or ones that deal realistically with funding the boomer retirement bulge) is that it's based on a market timing trap.  Might it just happen, that the mid-term prospects for the US economy --and particularly for the US stock market-- are somewhere between anemic and dire, particularly, if you compare our endemic and persistent across-the-board public and private debt levels to countries like Brazil and Argentina that collapsed during the 1990's.  By those terms, the US is a world basket case. Historically, we've seen numerous decade-long periods in which markets go sideways or down. These troughs always occur after stock markets bubbles while excesses in equity prices work their way back to traditional levels. By historical P/E levels, even after the drops that spanned mid-2000 to 2003, we have a long way down to go to get back to what has proved to be the norm. Further, there is no guarantee the drop (slow or gradual) will stop as it approaches the average.  Often, just as markets go excessively up, they keep falling to a low extreme that goes far below the mean.

All this to point out that there couldn't be a worse time to be forcing millions of new investors to get into the market.  The kinds of investments that will be proposed, will be indexes of baskets of stocks and bonds.  In a long term bear market --where good single stock or single sector bets may abound-- there is no worse strategy than putting your money into a broad index.  And we are sure that any scheme for private accounts will be pigeon-holed into broad indexes that have the dual purpose of pumping up the wider market and preventing the new and greater lumpeninvestoriat from getting taken right out of the gate.

But we suppose the answer to all this damage will be, "Never mind, we undermined the present system, never mind, we added a few trillion to the debt (off budget, of course), never mind, we made a lot of fund managers rich," the taxpayer will just have to pick up the tab.  BTW, that's what's happened in Chile and the U.K. where the private account experiment has some history.
But never mind, facts should never get in the way of greater (read, ideological), truths.


Written on a Mugwump

Posted by dymaxion at 02:27 PM

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January 15, 2005

In God We Trust

Manhole covers on Pennsylvania Avenue are welded tight.  Street light poles are removed for fear they may have been packed with some nefarious element while passersby within a 100 square block area get frisked as they walk to their homes.  Hundreds of thousands of police, para- and military forces have their assignments.  The routes to and from a score of more or less monumental sites are being scoured and sealed for the post event revelries.  From Tuesday on, DC will be closed off to traffic  and flights in and out of Dulles, BWI and Reagan National will grind to a complete halt by Thursday morning  Next week, in the DC Green Zone,  they will be partying.

Like the jumbo screens scattered down the Mall, what is truly eerie about this event is it's made for TV DNA.  In reality, the Presidential armada rarely ventures out on the streets of Washington.  Thursday's price-tag for the short 16 block trip up Pennsylvania Avenue to the West side of the Capitol and then back to the White House will come in well over $50 million.  To cover the $17.3 million in increased police coverage, the erection of ultra-secure parade stands, demonstrator barriers, etc, the federal government has asked the District of Columbia to use up funding it received for Homeland security infrastructure.  In other words, even as the sponsors charge $60 and up for seats in the grandstand for invitees, DC is being asked to use civil defense moneys.

As you know, we wouldn't have mentioned this piece of local chicanery here in BlowBack if there wasn't some wider tale to hang upon it.  And to put your mind at rest, no, we do not underestimate the importance of the symbolism: even as the country folk wage distant wars to protect the petroleum supply, er....  bring freedom and democracy to a corner of the Persian Gulf.   There is purpose in the great continuity of a presidential swearing in. Of course, for those of us old enough to remember Presidents casually walking down Pennsylvania Avenue after making their oath, this hermetic event hardly strikes the chord of business as usual. But yes, for the vast TV audience, the President must stand--or at least appear to- at the foot of the West Capitol steps with the great flags hanging below the dome as his backdrop, while he takes the oath of office. 

But television appearance is fungible.  So why not, in recognition of the war's toll, or in recognition of the Government's budget troubles or the great impracticality of trying to make believe the President of the United States can still venture out in an automobile a few blocks, forgo the most wasteful aspects of  this great expense?

Because, of course, at this pivotal moment in the evolution of the world economy, we have a President who has absolutely no recognition of waste or even the peril he is putting us all in as he continues to enjoy the cost-free life. As in the case of this inauguration ceremony, bills are for other people to pick up and, anyway, they, won't come due right away.

As we've mentioned many times before, the United States occupies a unique place in the world when it comes to money. As a result of monetary agreements made in the wake of World War II, Americans have actually been getting things for nothing for a long time. The dollar, by agreement, gets stored in the coffers of foreign government central banks as a so-called reserve currency.  In this sense, it is treated by the official world economy  as something akin to the gold deposits that once were the required backing for paper money.  But gold, for all its limitations (and we'll avoid arguing with you true gold bugs out there), has one great virtue when restraint is called for; it is limited by its rarity.

Throughout history, every time a country managed to break away from the shackles of backing up its paper money with gold, that paper money has ended up as wallpaper or garden mulch. In the latter part of the 20th Century we have managed to break that sad record (remember the Weimar Republic) by relying on the greenback.  And as long as the US remained an unparalleled engine of economic growth, the world has been willing to store its wealth in dollars.  Of course, this has been a great boon to the United States.  Whereas other  countries have to be careful about how much they import compared to their exports, the United States has had a blank check.  All told, the US has been able to print money, spend it on gadgets and raw materials from around the world and not worry that the errant dollars would ever come back for redemption. This is, of course, a privilege and a responsibility.

Just last October, the US spent 70 billion dollars more than it took in.  This was yet another in a series of record monthly trade deficits that add up to a series of record annual trade deficits (over 650 billion in 2004).  It's not hard to figure out what's going on, we merely have to pull into the parking lot of the nearest Wal-Mart or fly over L.A. harbor to get the picture.  Asia makes, we buy, they take more dollars.

For countries like the Asian titans and tots, this is a little like the goose that laid the golden egg. They may be getting paid in ever riskier and less valuable dollars but they are working, exporting and getting paid.  None of these countries wants this good thing to stop and so they have set up a kind of subsidy ring in which they use their extra dollars to buy up the debt the US issues in the form of T-bills. It would appear that they have too much as stake to let us falter.

What's to worry? you might ask. Maybe, this can go on forever or, at least long enough for us to come up with the next big thing.  And, perhaps it can and perhaps we will.  Nobody knows just what straw it will take to break the bank.  And so the Administration talks about fighting the war off this year's budget.  On paper, that means the deficit will  not be as big as it really is.  And, perhaps, we can pull a few trillion more out of the air to fund a scheme to pump up the stock market with private savings accounts; money that otherwise would have gone into government coffers through payroll taxes.

And yes, the Fed can always let the dollar float downward against the currencies of countries that have managed to save more and run up lower trade deficits.  And so we continue to bet that important numbers of private and public foreign financial interests will forgo the higher returns they can get by buying instruments denominated in euros or Swiss francs, say, ( some of the currencies that float up as the dollar goes down) to instead get dollar denominated gild-edges that will be paid off with negative returns as the dollar continues to devalue.

We, of course, don't know what is going to happen to markets or to vulnerable paper currency systems.   We do know, however, that even in topsy-turvy Bushworld , most people will seek to boost their profits.  Countries that go into debt to arm themselves to the teeth and then have to depend on the kindness of strangers for their daily bread, have not fared well in the past.  But perhaps, as  stock market cheerleaders remind us all the time, when it comes to counter-indicators like today's  historically high P/E's, this time it's gonna be different.

And so Bush will have his Green-zone inauguration, even if it costs an extra $50 mil or so. Like DC picking up part of the tab, up to now it's proved true, we can always beggar our neighbor.



Posted by dymaxion at 12:05 PM

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January 08, 2005

Off With Her Head!


`A cat may look at a king,' said Alice.  `I've read that in some book, but I don't remember where.'

Tut, tut, child!' said the Duchess.  `Everything's got a moral, if only you can find it.' And she squeezed herself up closer to Alice's side as she spoke.

In Alice in Wonderland the Queen calls for the lopping off of Alice's head even before her trial begins. Here in Bushworld, there's an added element to the topsy-turvy world view; for simplicity sake, let's call it class warfare.

For four years the policy has been to pump a kind of economic silicone into the body politic by running deficits designed to extend out the day of reckoning for the excesses of the 90's.  Rather than paying for that puffery, we've gone into a situation of chronic deficit spending.  Hell, we even fight costly wars ($150 billion so far) while lowering taxes.  Deficits, of course, are papered over by the issuance of government debt in the form of Treasury notes.  Since Social Security (or payroll) taxes continue to run a surplus --the projection is that this surplus will continue until at least 2018 at current rates-- one of the ways the deficit is paid for, is by government borrowing of Social Security payroll tax receipts..  That's because there is no lockbox.  What's actually serves as the lockbox is a ledger noting the same debt that sits in the vaults of of private and government central banks all over the world; i.e., debt that is backed up by the good name and faith of the government of the United States through Treasury notes.

It is estimated that at present payroll tax rates the Social Security fund will not run into trouble until the year 2052.  So, you have to ask yourself why an Administration that never mentions the present growing deficit its tax cuts have brought about, that hardly bats an eye as the country continues to run up huge foreign debt in its current account by importing far more than it exports (the present imbalance is over 650 billion a year and growing, as we outsource most manufacturing), has somehow seized on the perils of 2052 to focus its economic policy agenda.

Can you smell the rat, yet?  The people who whisper in Bush's ear have found a way to beggar future generations for what will be at best only be a short term tookus lift for the stock market and a giant windfall for the brokers who get to manage the private accounts the administration proposes.

To understand what happens, it's important to see how the proposal would impact the present system.  As we said above, basically the payroll taxes collected today are used to cover the SS checks sent out today.  The surplus in collected receipts, is redirected to cover deficits in the Government's general fund.  The Government then issues IOU's in the form of T-notes back to SSA. And that's counted in the national debt.

What Bush is proposing, instead, is that a portion of the money covering today's payouts be instead diverted and put into private savings accounts that would allow younger workers to invest in the stock market rather than in a guaranteed future fixed income check the system, as is, provides.

As a result, multiple billions of dollars (depending on the specifics) would be diverted from the SSA and sent to Wall Street, where it could purportedly bring in higher returns and "give young workers a stake in the ownership society". The manner in which we cover this massive diversion of  funds from the system, is still up in the air but because the Administration has already promised it will not raise payroll taxes , it will either be added to the national debt with the stroke of a pen in the dark of the night or will be covered in some other more mysterious way. One idea being floated in Washington is that some juggling of the way cost of living raises designed to keep SS payments in line with inflation might be legislated as part of the plan.  In other words, the benefits of those collecting already, despite promises to the contrary, will be slowly shaved away to back private savings plans that could eventually founder if the markets remain bearish. And flounder it might, for a long time to come.

Despite all the extreme makeovers of the last four years, the stock market remains in limbo.  Deficit spending, uncovered war spending, low interest rates, the devaluation of the dollar, the normal quirks of Mr. Market,  have all had the same effect: of putting off the inevitable. And the inevitable is that stock market valuations have been and still remain way above the historical norm no matter how you figure them.  The Wall Street pumpers will always tell you that this time around it's different but the fact is that valuations always come back to the norm which historically, is somewhere, in P/E ration terms, from 16 to 10.  That ratio today is at around 27.

There is no exception, markets always come back to the norm, and for good measure, usually continue on past it, up or down.  We have still not shaken out the excesses of the tech boom, despite the bust, and are therefore still in the process of doing so.  Historically, that could take more than a decade (it took from 1929 to 1949 and 1966 to 1982 the last two times) or it could happen faster with a major retreat but eventually, despite momentary head fakes and jukes, the market will find its norm.

In Silicone Valley East (Washington, DC) the ugly duckling always becomes a queen, at least for a day.  The motto, of course, is whatever it takes to get re-elected.  No one in Washington ever worries about the long term.  When they do, it's time to hold onto your wallet.  The Social Security reform being put forward has nothing to do with Bush's retirement --that's laughable, though he did cite it yesterday in his speech on the subject-- and everything to do with a scheme to prop up the markets with new government-guided cash injections into the stock market taken straight out of payroll taxes. 

If fund manager bonus checks can be compared to tookuses, you can see them kissing them already.  Just attend one of the many fund raising inaugural dances scheduled for Washington this month.  One thing is sure, the fat cats will be having a ball.  



Posted by dymaxion at 12:55 PM

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