Category Archives: The Fisc

A Bit Of Math

Simon Mikhailovich of Tocqueville Bullion Reserve reminds us of the deadly numbers with a sobering tweet:

A bit of math. With the global debt / GDP ratio at 320% and the cost of average debt service at 2%, it takes 6.4% growth per annum just to service the debt. Not happening.

Why I Like The Dutch

Mario Draghi visited the Dutch parliament today and received an “unenviable grilling” from Dutch MPs for nearly two hours which, as the FT said, left the usually implacable Italian confrontational and riled up as tempers flared.

At the end of the meeting, the Dutch gave Draghi a gift – a tulip.

At least someone still has a sense of humor.

Consumer Prices

Everybody has a bias when it comes to measuring price inflation. Reports like the Devonshire one come out quite frequently, usually complaining that the government indexes understate inflation. They all say, well the numbers don’t reflect reality. The problem is, they don’t know what reality is any more than the government does. My reality and the next person’s are completely different because we buy different things. Cheap loans have allowed universities to raise prices in an outrageous fashion – but our kids have long since graduated so it doesn’t affect me, although anyone putting kids through college is being eviscerated. Consumers react to prices. Technology changes. Quality changes. Fashions change. And so on. All these things make any index pretty much useless, except for making political arguments. So one has to ask, in the famous words of Ms. Clinton – “What difference does it make?”

If you ask someone in Venezuela right now, of course, you would get an expletive for an answer. There is massive consumer price inflation because there are not enough consumer goods to meet demand, and so people are going hungry and without toilet paper. They are driving up prices, trying to outbid one another to compete for what little supply there is. But even in that desperate situation, there is no agreement on what consumer prices actually are, even by disinterested parties. The only way to fix the problem in Venezuela is to get goods back on the shelves. If the Venezuelan government can do that, then consumer prices will reflect the value of the bolivar and general world price levels.

There’s your clue. If you want to measure consumer prices, it is easy. Just use the Big Mac, as the Economist does. It works. 2016 USA Big Mac price inflation was 2.6%. Venezuela Big Mac prices in bolivars:

July 2014: 75

December 2014: 245

July 2015: 485

December 2015: 940

December 2016: 3550

Looks like a pretty decent metric. It tells you what you need to know – there’s a big problem.

But the economy does not run on Big Macs, and I’m interested in the inputs, not the outputs so much. And those are labor and energy. Nothing else much matters.

Nobamacare

The repeal or gutting of Obamacare is apparently back on the table.

This US system of so-called health insurance is a joke. The principle behind all insurance is that you pay the statistical or actuarial cost of your protection, based on your personal risk exposure. To over-simplify, the idea is that you can afford to pay 1% of the cost of a condition that you have a 1% chance of getting, and if your number comes up, the insurance company can afford to cover your costs because of the 99 other people paying, who don’t get the condition.

In the case of health “insurance”, this simply doesn’t work for everyone because many people can’t afford to pay, especially those with known conditions. So they are denied coverage, either explicitly, at any price, or implicitly by prohibitive premiums.

Many countries simply say, well that’s no good, so we’ll throw out the insurance model and simply pay for everyone’s healthcare out of tax revenues. This is better than one might think because getting rid of the insurance companies saves enormous amounts of money, and controlling the pay of health care providers saves even more.

Obamacare took a different tack, which was to say we’ll keep the insurance model but make healthy pay insurance premiums which are much higher than their risk to subside the cost of care for the sick. In effect, this gave the worst of both worlds – a tax paid to the “insurers”  and out-of-control costs of care. The insurers liked this because they could charge what they liked, the providers loved it because the insurers had no motive to control costs.

Unfortunately for this model, a loophole was left where healthy people could pay a relatively small penalty and avoid paying the “tax” – excessive premiums. So they did. and the insurers were left with a client base of sick people who could not afford to pay the cost of their care. In order to avoid complete collapse, President Obama took the profits from Fannie Mae and other government lenders and funneled them to the insurance companies as a sub-rosa subsidy. President Trump can stop this with a stroke of his pen.

Personally, I think we should get rid of the insurance companies and fall in line with everyone else. This is not likely to happen, because the insurers and the providers will bribe Congress to continue their largesse.

Inflation

There is much noise that the Fed will raise interest rates to combat “inflation.”

Over the last year to the end of February, wages are up 2.8% (nominal). The price of oil, as a metric for energy prices, is up 32%.

Guess what is driving “inflation.”

The Saudis are still pumping as hard as they can, but justifying it on the grounds that they are storing the above-quota output, not selling it internationally. It seems to me that a tank in Saudi and a tank in Oklahoma are pretty much fungible, except that we at least think we know how much is in the Oklahoma tanks.

The bottom line is that global inventories of oil are continuing to expand to new records, more or less on a daily basis. The EIA is forecasting that US shale is set to expand production by 109k barrels from March to April, rising from 4.853mmbpd to 4.962mmbpd, and offsetting OPEC’s entire February production cut.

At some point we are going to see a reaction and that will be the end of “inflation.” For a while, anyway.

Socialism Is Good For You

If you need to lose weight, that is. Due to lack of food supply, Venezuelans have lost an average of 19lbs. over the last year. This despite having the largest proven oil reserves in the world.

California Government Pay

In case you were feeling that government employees in California were underpaid, here’s BART janitor Liang Zhao Zhang pulling down a mere $271,243 for 2015 (and a total of $705,000 in pay and benefits during the four years from 2012 to 2015.).

Check out some of his colleagues here.

Greece Again

Greece is back in the news. As a pretty much unbiased observer, a few points:

  • The IMF is right. Greece cannot pay its debts. Debt repayments come from surplus, profits in a sense. They’re not there, and they’re not coming.
  • Greece is a zombie. It needs a fresh start desperately, for humanitarian reasons if nothing else.
  • Apparently, there is no provision in the rules for a Eurozone member to go bankrupt. Therefore, the Eurozone rules need to be changed. It is foolish to believe that bad things don’t happen.
  • Germany has profited hugely from the Eurozone – on paper – but a lot of those profits are yet to be collected because they are in the form of unpaid debts.
  • Germany is, understandably, reluctant to write off any of those debts for fear that the whole racket will come apart, so it insists on the “nuclear option” of Grexit. As the French would say “Pour encourager les autres.”
  • Draghi is unwilling to take a leadership role in resolving the situation, because he knows that if Greece is given a less painful solution, then Italy is next in line. And Germany will be on the short end of the stick.
  • It is likely that nothing good will happen until Merkel and Schäuble are gone. The good news is that, because of the immigrant crisis, their departure from the scene is no longer unthinkable.

Employment

President Trump has made a lot of headlines with promises to “bring jobs back” and get people “off welfare and into jobs.”

Are these promises realistic? What will it take to get people who have left the labor force, or never entered it, working?

The first problem is the so-called welfare cliff. Research from the Illinois Policy Institute details the welfare cliff experienced by single-parent, two-children households and two-parent, two-children households in Cook, Lake and St. Clair counties, and the city of Chicago. This is just an example, there are many other such charts which vary in minor ways depending on location, family circumstances, etc.

The second problem is skills, or rather the lack of them. Picking on Chicago for the simple reason of consistency with the welfare cliff study above, we find that 37% of adults have low or limited literacy skills (level 1 or below on the PIAAC scale). This means 5th. grade skills or less – almost all can read a little, but not well enough to fill out an application, read a food label, or read a simple story to a child. On a national basis, the most recent data I could find shows about 25% for unemployed or out of labor force adults, 18% overall at level 1 or below.

This, of course, says nothing about job-related skills or numeracy. Nothing good, anyway.

Just bringing back jobs is not going to fix either of these problems.

Unbalanced

So let’s see. Janet Yellen, at least as of yesterday, sees three or more interest rate increases in 2017 and wants the dollar higher. The Trump team, reportedly, will seek large cuts to government spending.

So… tighter monetary policy + tighter fiscal policy + unfavorable export pricing = market euphoria? Sorry, that equation doesn’t make sense.