The United States Federal Government is not Broke.

I used to be upset about the amount of money the United States Government (USG) is borrowing, and promising to pay in the future. National Debt is about $20 Trillion. Add unfunded liabilities, like Social Security, Medicare and Medicaid, and the total may be $126 trillion.

Since the entire output of our nation, all business, everything is about $18 trillion per year, we seem to be in deep dodo.  Many commentators say that default or massive inflation to inflate away the debt is inevitable.

Its like an individual having debt 7 times his annual income.  If you income was $ 200,000 pa, you debt would be $ 1.4 million dollars! Holey Mackerel.

Yet I know lots of people who have under $500 thousand pa income and a $2 million house (with a $2 million mortgage).

The issue is, they have very large debt, but they have very large assets. Most homeowners with massive debt only get in trouble if the value of their real estate assets takes a dive, then in essence they then have massive debt and little assets.

Lots of countries with lots of debt have very little in value of assets. The government of Greece has some really nice islands that they would be loath to sell. Otherwise the purchasing and debt service power of Greece is mainly its ability to tax its citizens.  You can’t get blood from a stone. They are in the situation the USG would be with $126 trillion obligations and a $18 trillion economy to skim money off of. You ain’t going to get anywhere  for decades.

The USG, however, has lots of assets.  It has the largest gold reserves of any nation by far. Unfortunately all the gold in Ft. Knox is worth less than a half of one trillion dollars. A drop.

The USG is a big landowner: The Federal Government owns nearly 650 million acres of land – almost 30 percent of the land area of the United States. What so you think 30% of the land in the USA is worth if sold at auction?

The USG ownes about $128 trillion in energy resources.

 

 

Thank Goodness The Government is Helping us Afford Housing, Education and Health Care.

The Government has many programs to help us acquire affordable housing, affordable health care and affordable higher education.

Thank goodness.

Think how painfully expensive these things would be if we let the free market deliver them, like we pretty much do with food, household consumables, clothing, shoes, transportation, electronics and energy.

What thirty year old has not run up $ 50,000 of debt to feed, house and clothe themselves for the last four or five years? You know, like the debt they had to run up in order to get a undergraduate degree and be taken seriously in the job market.

Who does not rage over their weekly grocery bill like they do over the payroll deductions and the unaffordable co-pays for health insurance  that recently appeared?

Who is not driven to despair each time an article of clothing or an automobile wears out and they need to buy a new one? Like they are when they discover that it is time to buy a house and a house in a safe neighborhood with decent schools is beyond their reach. Not a luxurious house, just in a safe neighborhood with decent schools.

What’s that? You say food, clothing, transportation, electronics and energy are not very expensive relative to our paychecks. Exactly.

In 1976 it took 3.5 times the average income to buy a house. In 2012 it took 5.0 times the average income to buy a house. Good work.

Is the White House Plagued by Leaks or Fake News

Many are reporting that the White House is leaking like crazy and making it very difficult for the POTUS to get anything done.

The leaks are always by unnamed sources, meaning that there is no way to confirm that there was a leaker or that the reported content was accurately represented. Quite simply, you are taking the word of a reporter, or editor or news organization. You actually do not know their internal policy on validating a reporter who reports a leak. Maybe one or more higher ups somehow check on the story, maybe not.

The whole leak story rests on one thing, the integrity of the press outlet. The press is so partisan now, I believe they would lie to forward their agenda. With reporting of White House leaks, if one report was a lie there is no way for it to be discovered.  A White House official cannot refute it because the leaker’s identity is secret. Another reporter cannot investigate the story because the provider of the information is unknown. Insiders with knowledge that leaked reports are inaccurate cannot even confirm that because they would be leaking privileged information them selves.

So the sole foundation of a reported White House leak is trust in the media organization reporting it.

a camel is a horse designed by a committee

In the early days of the Internet people connected to it over their ordinary telephone lines. They were called POTS lines, standing for “Plain Old Telephone Service”.  It required use a modem, a device like a fax machine that turned digital data into modulations of sound that traveled over voice lines.

Everyone wanted speed, because the connection to the Internet with a modem was painfully slow.

Engineers and others would find ways to make the modem more efficient but for many people to use a device required standards. You would not want you modem to work if you called “X” but fail to work if you called “Y”.  So there was some international agency charged with approving standards for modem protocols. I think it was called something like “IEEE”.

There was v.32 then v.32bis, then something better. One problem was the IEEE always took years to agree on an international standard. People wanted the speed as soon as it was obtainable but the IEEE took years. So the modem manufacturers started selling modems with the latest technical speed booster before standards were agreed upon and put their firmware in flash memory which could be upgraded to the standard if the IEEE got around to it before the next better flavor was invented.

My business got a truly high speed connection to the Internet. A brand new Cisco 2500 router (called 2500 because they basically sold at $2,500) and a CSU/DSU (a sort of digital modem). I leased a dedicated line from the local Bell, no POTS service nothing. Basically dry copper over the phone network so the CSU/DSU did not have to convert digital to analog sounds.

I could not speak cisco, so my connection supplier provided an internet connection up to the Ethernet port of the Cisco. In other words, he programmed the router.

He told me an entertaining story. I can’t remember everything but I got the gist.

Internet Protocol (“IP”) was developed by a US Government agency to connect supercomputers (very expensive and very few) to university, military and government users in geographically distant locations. The point being, it was never developed by an international committee to serve countless masters.  It networked different types of networks together.

It was open source so anyone could use it.

Unix operating system designers started including it because, heck, lots of Unix workstations were in universities and research facilities and it was useful to be able to join the IP networks.

It started growing like crazy and eating every other network protocol. Do you remember Novell? It was not the best networking protocol lacking in security and other enhancements but it was free, had major market share and open development.

My Cisco guru once told me, and this is the point of the story, that people started using Cisco routers to connect using IP to other networks. It was becoming the universal language. European authorities finally said “you may not sell Cisco routers in our countries unless you include the INTERNATIONAL NETWORKING STANDARDS in you operating system.” Our protocols were designed by consensus and are much better than IP but are frozen out by established base. So Cisco included all the IEEE whatever protocols carefully designed by committee and no one used them.

Which means, don’t try to design from authority a perfect or even better standard. In the rough and tumble world a leader will emerge, it may not be perfect or even the best, but it is almost impossible to impose a technologically best solution. The failings of the leading technology will be reduced over time as they are discovered and hurt users.

 

 

 

 

Things that Annoy

Certain canards just get me going.  When I read any of these my blood pressure spikes and I see red, and I seem to be reading a variation of one or another of these all the time.

  • Capitalism requires low wage workers. This is generally expressed in the context of “why the establishment favors unlimited immigration, both legal and illegal.”  Capitalism requires private property, enforceable contracts, and rule of law. If you have those, then the natural desire of people to better their situation takes over and arranges the things that are present in better arrangements over time.

Japan has few immigrants but a very high first world standard of living. The economy of Japan is stagnating, but that may be because they abrogated the rule of law to prevent their banks from going belly up. One can keep zombie financial intermediaries alive forever with the brute force of unlimited government but you can’t expect the efficient allocation of capital thereafter.

Similarly, I often see “the modern economy relies on cheap energy, with energy getting more expensive to produce the good times are over.” In truth, the cost of various things are sometimes cheap and sometimes dear. If something gets too expensive people substitute other things.  Running a household once required one or more servants. Even poor Raskolnikov had a landlady who prepared meals and tea. When servants became prohibitively expensive, people substituted refrigeration, washing machines, appliances, etc.  Try asking your landlady in Manhattan to do your daily shopping and serve you a snack.

Capitalism, because it embodies freedom, merely rearranges the building blocks available in an order that increases value.

  • Rampant Consumerism is a great evil somehow destroying America.  In reality, consumerism means the average person gets to buy services and things that he very much desires, just as rich people have always been able to.

 

  • Financialization is destroying us.  Truly, I don’t even know what is meant by financialization.  Online sources seem to feel part of it is the increasing size of the financial services part of the economy.  Believe me, I remember when “industrial” was a respected word: The Dow Jones Industrial Average, The US Savings Bonds Industrial Payroll Savings Committee. These names were not accidents, industry was the business of America; bankers were 3-5-3 people, take deposits at 3 percent interest, loan the money out at 5 per cent interest and go home by three o’clock.

Truly, things have changed. The Dow Jones Industrial Average includes Facebook, Amazon and Google, not industries in anyone’s book, maybe it includes Bank of America and Goldman Sachs. Industry created value and bettered people’s lives, but so do other things. Would you like to live in a world with no literature, or musical performances, or interior design services? Anything that satisfies people’s wants or needs is a valid subject of capitalistic enterprise.

Another criticism is over the increased influence of finance institutions over other aspects of business. Under this view, financial institutions and financial elites have way too much influence over the business of America. Just let Henry Ford produce the cars that got America on the road,  not have Steve Jobs forced out of his own company once it went public and the finance people didn’t like the rate of return.

In my humble opinion, (IMHO in the old school Internet) the allocation of capital is the most difficult and the most value adding aspect of a free market. The US Government has allocated capital as it sees fit.  There was the synthetic fuel  corporation under Jimmy Carter.  During the oil embargo who could not better humanity by creating synthetic oil? Well, you haven’t heard of the synthetic fuel corporation because millions of dollars were sunk into it with 100% loss.  Then there is the strategic oil reserve. The US government bought oil when it was expensive and scarce (driving up the cost to taxpayers and to drivers, home owners, and everyone else who used oil). Now oil is overabundant and cheap. The reserve could be filled at half the cost, but the government is thinking of selling a portion of it.  Great investing. The solution to high prices are high prices. The market produced more oil and lowered prices. The government intervention was unneeded, costly and wasteful.

 

 

Govt Regulation Benefits the Large, Established, Powerful and Rich

I used to own Altria, the tobacco company that makes Marlboro cigarettes.

Since 1978 Altria is up 12,000% while the S&P 500 is up 2,000%.  It also pays a 3.4% dividend.  I figured it was selling a legal addictive substance and therefore should make a lot of money.

I lost my nerve when I kept reading about new regulations prohibiting smoking. When I read about no smoking outdoors in parks or no smoking in your own apartment if it was a connected apartment complex, I sold. The business press was assuring me that Phillip Morris International which was all the cigarette business outside of the USA, was a better growth prospect. It did seem to me that the Japanese and the Chinese enjoyed their smoking and had less regulation of tobacco. I owned that for awhile but it lagged Altria by a large margin so I sold that.

One of the things that scared me was the FDA (Food and Drug Administration) decided it could regulate tobacco as a drug. I pictured having to go to your doctor to buy a carton of Marlboro.  I should have considered my own advice that government regulation favors the large, the strong, the established and the rich, always.

Now I hear that Altria is going gangbusters. It is quite possible that Altria (Phillip Morris) is benefiting from regulation.

 

Philip Morris stands to benefit from this regulation in many ways. First, all regulation adds to overhead, and thus falls more heavily on smaller firms. Second, restrictions on advertising help Philip Morris’ Marlboro, a brand everyone already knows, by keeping lesser-known brands in the shadows. (Existing restrictions on advertising have already helped Philip Morris in this regard, with an added benefit spelled out in Altria’s annual report: “Marketing and selling expenses were lower, reflecting regulatory restrictions on advertising and promotion activities. … ”)

Finally, if the bill passes and the FDA gets added control over the industry, Philip Morris, more than any of its competitors, will have access to those bureaucrats and agency heads making the decisions. For all these reasons, RJ Reynolds and other tobacco companies oppose the bills Kennedy and Waxman are pushing.

 

TrumpCare Fails!

Big news: Obamacare is not replaced by Trumpcare.

Do you really want one quarter of the economy and your ability to purchase lifesaving and life improving interventions managed by, designed by, and named after a politician who never delivered any health care or ran an insurance company?

Washington had no computer policy yet IBM, Microsoft, and Silicon Valley developed by voluntary organic self-organization. Somehow we get lots of computer provided products at reasonable or free prices.

Washington had no individual transportation policy, yet Detroit grew and produced cars affordable to the average American. This all occured before Eisenhower created a national highway system.

Washington had no entertainment policy (perhaps entertainment was not important enough to deserve Washington meddling). Now we have free and low cost entertainment that is so good the whole world inports our products.

Washington has no kitchen appliance policy, or footwear policy, or vacation package policy, or book and magazine policy, or (until very recently) Internet policy. All those areas are horrible for consumers, right? Oh, wait.

Where does Washington have it flagship policies?

Well there is housing.  Washington had to intervene in the housing market to encourage more ownership and by the right people. Lets see the results. The housing market experienced an unsustainable bubble and then crashed bankrupting all the banks in the country and the Washington backed mortgage finance companies.  Requiring taxpayers to provide millions or billions of their hard earned money to bail out the housing finance “system” (banks, Freddie Mac, Ginny Mae, mortgage backed securities, etc) or face economic collapse.  Nice work Washington.

Lets look somewhere else.

Well there is college education. To help less advantaged students gain a college education, Washington provided guaranteed, non-dischargeable, subsidized loans to anyone who wanted to dream of a college degree. The waterfall of money led colleges to raise prices to soak up all the free money sitting on the table. Washington certainly benefited the colleges – the local college is the only nice place in most declining areas. From Johns Hopkins in Baltimore to Lafayette in Easton, PA, the college is the only thing with money to make a nice appearance.   Of course, the students cannot repay the loans. Taxpayers will have to have their hard earned dollars used to forgive student loans that never should have been made in the first place.

Well there is the retirement system. Washington said, left on your own you would invest in the American economy hoping it would fund your retirement years. Foolish Americans. The American economy is risky – look at 2008 when the stock market lost over 50% of its value in a few months.  Much better to give your money to the USG in the form of payroll taxes and in return for the USG promising to give you lots of money when you retire. While the USG can borrow unlimited amounts at near zero costs to spend anything it wants, this is a good deal. Greece had the same deal when Germany lent it any amount of euros. When repayment became an issue, Greece became a nation of people looking at tree bark for nutrition. If you like the prospects of the social security system, bravo. Most younger people understand that there will be nothing in the social security system for them in the future. It is a scheme of Washington that will end in tears for most everyone.

What next for our technocratic masters in Washington?

 

 

Capitalism is not an ism at All

To me, capitalism is simply the absence of force in human economic relations. If you wanted people to be able to deal with each other freely by voluntary agreement, you would get private property and capitalism.

It is not an “ism” at all.

Alright. I have to fend off some common attacks. Capitalism requires private property. All property is theft.  How does someone acquire legitimate title to property?

In law school I learned the first way was appropriation from nature. Sort of like mixing your labor with something that was freely available in nature to anyone who could take it. Deer hunting, for example. No one says the hunter who bags a deer on public land is not entitled to his venison chops.  Or if I picked up a tree branch and carved it into an exquisite statute. I took something from nature, available to anyone, and made it valuable by mixing in my skill and effort and then own it.

In the field of real estate, mixing your labor with nature is adverse possession. If you take a tract of land (lawyer talk) that someone else is not actively using and use it like an owner and your use is notorious (not hidden – visible to all), exclusive (you act as if it is ours – prevent others from using it) and continuous (for a period of years), the land becomes your property.  That is still the law in the USA. It has been the law in common law countries for centuries. You created private property by taking something from nature and mixing in your labor and you made it your property.

The other way to legitimately acquire property is to get it in a voluntary exchange from the previous owner.  Buy it.

Here is a problem. I buy a house and land from “X”. Only he got it from someone who got it from someone who stole it from an Indian tribe. I don’t have good title! If you are forever open to examining the providence of title, or you are willing to accept new evidence about the validity of title forever, then no one has good title.

The solution is you pick some date that all titles to property existent on that date are recognized as valid. No secure property title means you might find that someone else owns the land you just spent millions to develop.  Do the Indians who sold Manhattan have a claim to the property or do the Indians who lived on Manhattan before them and were forced off by Indian war? In the future will we discover an even earlier user of that land who lost it by war? One must simply set a date and say all titles to land at this date are legitimate no matter how arrived at – otherwise it is a never ending examination and no one can invest to improve land sure tha tthey own it.

All property is theft from an absolute justice point of view. In practicality, as the centuries of unjust appropriation of land recede most property becomes something purchased instead of stolen. Cosmic justice is impossible for mortals. I would like capitalism and private property with perfectly just determination of who has title to every square inch of the Earth, but it ain’t going to happen.

So, once title to property is established, capitalism means you do not have to enter into any agreement that you do not want to. Generally, that means you do not enter into any agreement that does not benefit you. So each agreement, each transaction, everything, makes you better off.

Another objection. The hungry man cannot negotiate to voluntarily trade with the rich man. The hungry man has to take what he is offered. The sick patient cannot negotiate price with the life saving doctor. The average intelligence man cannot negotiate fairly with the genius.

Well, your needs and limitations are just facts of nature. If I develop a shopping center at great expense on land I own and an earthquake destroys it, nature took its toll. I can insure or otherwise provide for it, but it does not mean other people have to make up my profit. My misfortune is mine, not an argument that people should not be able to make free agreements that they desire designed to improve their economic standing. I may have less freedom to contract because of circumstances. I may need money more than the other party. That is no reason to destroy freedom to contract which does so much good.

So if you set aside the argument “all property is theft” which really means human knowledge is limited and imperfect. If you set aside the unequal bargaining power argument, which really means, we won’t allow some people to act freely because of our paternalistic attitudes. Then you get capitalism.  Legally protected ownership of private property and the ability to voluntarily make enforceable agreements with others regarding it.

In relatively capitalistic twentieth century America, very average people progressed their material well being fantastically. They did not need smarter people to protect them by taking control of their lives. The middle class grew to undreamed of proportions. Human kind no longer was a small rich elite and a giant poor underclass, as it was for most of the history of mankind.

A large middle class was a product of free market capitalism. It was an American phenomena for tha most part. More socialistic mixed economies failed at that.

 

The End of Work

Conventional economic wisdom is that the world suffers from a lack of [aggregate] demand. In plain words, people and businesses are not willing to purchase as much stuff as can be produced.

There are many suspected causes. Past debt may be causing people to not take on new debt. Stuff purchased with borrowed money is also stuff purchased so reduced borrowing reduces [aggregate] demand.

Another suspected cause is wage stagnation. Wage earners are more likely to spend whatever they get in a paycheck. Wealthier people might save or invest extra money. Less in wages, more in investment returns leads to less spent and more saved and invested.

If these are indeed causes, the proposed solutions are things like asset purchases by central banks to put money in the hands of banks (TARP), or lower interest rates to encourage borrowing, or even negative interest rates to cause savers to spend. A higher minimum wage will place money  in the hands of people who have a propensity to spend.

Still, I can’t help wondering: how did we get to a place where demand is lacking, after so many decades where there was lots of demand supporting the creation of great industries? I mean, human wants are infinite. Introspection shows me that I have lots of demand. Well, I guess it is not demand unless I have the dollars to do something about my wishes. The 2008 stock crash ruined my plans. My assets are returning to 2007 levels today, nine years later. By normal growth expectations my funds would have doubled in nine years. I certainly don’t want to borrow since I have so much less today than I reasonably expected to have. At current projections I have many more years to work after age 65. Looking at things “from the other side” so to speak, my lack of demand is merely a lack of assets/income. If I had more money I would demand more stuff.

So let’s look at ways I could have more demand, i.e., get more money. As I previously said, more borrowing is out of the question, Americans are leveraged up to the hilt.

I could drive for Uber on my days off. People around here actually make good money driving late Friday and Saturday nights so that other people can enjoy a drink or two in the evening safely.

Maybe it is a lack of opportunities to make more money that limits my demand. Why are there a lack of ways to make more money when people all around me desire things and services?

Uber is an example.  Uber fills many people’s desires or needs, and allows others to make money doing it. Obviously where Uber operates more people use it than use cabs where it does not operate. I laugh at the idea of getting a cab in the suburbs at a private house party where I had a few drinks. It would be an hour or more from calling a dispatcher to seeing a ride, if they arrived at all. Yet local governments are waging an ongoing war against Uber in many areas. The existing cab companies have a monopoly and give poor service at low cost, skimming the most valuable customers while ignoring all the others. Millions of dollars of potential commerce are stifled in preserving the  monopoly rent of a few established players. Millions of dollar value units of demand are never created because the potential providers are prevented from providing value to other people.

Those people around here who are making good money driving for Uber could never get a job with the local cab company. The demand for the crappy service they give is limited.  The pay is poor (I don’t know why, when the Uber pay is good for a hustler). The positions are not just when you want to work but you need to fit schedules and shifts and maybe give up other employment opportunities.

There are many other ways to make money that are effectively banned. Peter Schiff reports that financial regulation has become so oppressive that he today could not form his financial firm. I started an ISP in 1987 with a Unix server and a dozen modems in my basement. There were very few regulations applying to someone who wanted to run a computer in his basement and allow other people connect to it over a public telephone line with a modem. I closed down my ISP when the federal government created a law that required me to keep copies of every email my friends and neighbors sent through my system for some months in case they wanted to spy on them. Could you imagine starting an ISP today? What are the net neutrality requirements and where do I get software to implement them? Only a giant corporation could follow the rules.

Right now, in America, it is very difficult to compete with any established business. Big companies are C corps and pay a top tax rate of 35%. A small business or start up is an LLC and pay as an individual at a top federal tax rate at 39.5% A big company can have an HR and a legal department that allow it to navigate regulations. A small business is often a one or two person shop. A big company can get a special tax deal on pain of moving jobs out of the community. A small company does not get its phone call returned.

Main Street, small business, local start-ups are all suffering under our current political system. There is less growth and innovation, which comes mostly from small business and start-ups.

So I think a contributing factor to the lack of demand is the smothering of competition against entrenched interests.

 

 

 

America is Japan

What ails America is obvious. You will never hear it from the media, academia or the US government.

We have the Japan disease.

Japan had a huge  asset bubble, probably caused by its central bank but definitely caused by its government. Rents per square foot in Tokyo prime districts exceeded rents anywhere on earth. Homes were selling with 50 year (two generation) mortgages. A twelve year old son was on the hook for payments the rest of his productive life.

When, as is always, the bubble burst, banks and everyone owning assets faced staggering losses. Real estate, stock, bonds, everything.  The government, being the agent of the status quo, stepped in to stem the losses of the elite.  No Japanese bank or large conglomerate failed. That is what happened in the USA. When the financial system imploded from bad loans and other obvious crimes the Federal Reserve bought a trillion dollars worth of worthless real estate securities to stop one bank after another from failing.

Great, few financial  institutions failed. We got instead the Japenese economy. If you try to run capitalism where whoever has a profitable business is guaranteed to continue in business, you get frozen capital, misapplication of resources and stagnation. Thirty years and counting for Japan, Inc.