Wednesday, December 31, 2014

Greece is Back in the News

The patchwork of loan guarantees provided by the EU is falling apart. Greece will be the first to go, but ultimately even mighty Germany will be unable to avoid drowning in sovereign debt.  None of the countries in Europe are growing GDP, but all are growing sovereign debt.  What was a crisis five years ago is something far, far worse today.

A default (full or partial) would have solved Greece's problems five years ago and insulated the Euro from trouble.  But, the constant refrain that the Euro cannot survive a Greek default has led to the current debacle.  When there is no way to pay debts, it is time for a "workout."  That time has long since passed for Greece.  Now, there is only political theater.

The interesting question is what will happen to Germany.  (Isn't that always the interesting question for Europe?).  German fiscal situation is now hopelessly intertwined with that of the European Union, which is not good.  The Germans have underwritten a massive amount of sovereign debt of its Euro brothers and sisters.  This won't end well -- for Germany, or for anyone else.

It is still possible, were there the political will, to begin a partial default of all of the Eurozone sovereign debt.  This would permit the Eurozone a restart and provide a strong motivation for economic reform.  It is unlikely that this will happen.  So, the future for Europe is economic stagnation, possibly for generations.  The pain from this economic stagnation afflicts mostly young folks and the economically disadvantaged, so don't expect the European elite to complain (or to reform bad policy).

Wednesday, December 24, 2014

Economic Growth Breaking Out?

The revised GDP number for third quarter 2014 in the US surged to 5.1 percent in the announcement from the Commerce Department on Monday.  That is the best number in a very long time.  The year as a whole is still expected to finish closer to 2 percent than 3 percent, but good news is good news.

Is this the beginning of a growth break out?  It could be.  The most encouraging part of Monday's report was the boost in business investment spending.

For consumers, the fall in gas prices at the pump and the coming fall in home heating costs are big, big positives.  The negatives are the continuing sluggishness in housing, the damage done to the domestic oil industry from the collapse in the price of crude oil, and the continued strangulation of the banking system by regulators.

Economic growth solves lots of problems.  Something good could be in the offing.

Monday, December 22, 2014

What About Education?

Almost all of the news about US colleges and universities these days is about non-educational activities -- and the report card is not good.

For the past month, we have been treated to a news barrage on the internal criminal justice systems that have become implanted in the elite colleges in the past decade intended to deal with various bad, even criminal, behavior.  It should come as no surprise that these internal criminal justice systems are doing little more than providing selective enforcement and political posturing.  Alleged felonies are treated with unbelievable leniency, while politically incorrect speech is treated with maximum severity.   Meanwhile the police and court system are effectively excluded from the process, guaranteeing that bad behavior, including felonious behavior, will continue, perhaps even increase.

It is not uncommon to see $ 100 million athletic budgets administered by former coaches and athletic administrators with almost no business background at all.  These administrators, mostly former athletes, assume that winning is the only available business model, creating an atmosphere and an ethos that runs counter to the goals and aspirations of the education side of the college or university.  Such a plan also produces massive financial losses.  Football and basketball coaches, with contracts that some hedge fund owners would envy, are now among the highest paid workers in America.  For left wing faculty decrying income inequality, they need look no further than their own place of employment.

Meanwhile, education takes a back seat.  Increasingly the school week has been shortened to four days, leaving three full days every single week for students to party and for faculty to do whatever it is they do when not teaching.  Employers note the lack of writing skills and limited mathematics backgrounds of today's college graduates.  How does that change, when the college administrators are devoted to so many other pursuits, completely unrelated to their fundamental mission?

There are no real goals for the modern American universities.  So, these places invent their own.  Education, inevitably, takes a back seat to other goals -- mostly politics and entertainment.  Perfectly predictable.

Economic Growth in the US

The US has always benefitted from the relative stupidity of the rest of the world.  If the choice is between investing in America or investing in Venezuela or Russia, the choice is pretty easy.

So, America has always attracted foreign investment because the alternatives are often unappetizing.  They are today.

Where would you put your money today?  In the Eurozone?  In Brazil, Russia, India, or China (the BRIC countries)?  The US is undoubtedly a country in relative decline, but even in decline, it looks like a safer haven for investment money that the available alternatives. 

The combination of very slow growth and zero interest rates is perfectly consistent with a world that prefers to "park" it's money into the "relatively" safest spots on the planet.  But, without investment ("animal spirits," Keynes would have said), economic growth will remain paltry.

Sooner or later, the realization will dawn that the prospects over the next century are much brighter in Asia than in the West and money flows will begin to head that way.  That will require some changes in Asian laws and treatment of foreign capital and foreign ownership.  But, that will come, in time.

In the meantime, the US will appear the least bad of some very bad alternatives.

Sunday, December 21, 2014

Health Insurance Without Health Care

The absurdity of Obamacare is becoming increasingly apparent as folks with health insurance are avoiding using the nation's health care system.  Why?

The cheapest policies on the exchanges are those with very high deductibles.  This means that the insured must pay very large amounts of money out of pocket before the insurance kicks in.  In order to avoid large out of pocket payments, large numbers of the insured are simply doing without health care.

A recent article by Associated Press reporters Ricardo Alonso-Zaldivar and Jennifer Aglesta detailed the experiences of many who find that their new plan, replacing the one they had before Obamacare, makes even routine health care unaffordable.

The outcome -- these folks are insured, but do not get healthcare.
Supporters of Obamacare are not interested in outcomes and are not likely to care if increasing numbers of Americans go without health care, so long as the Obamacare narrative of expanding insurance coverage can be touted.  Who cares if the actual provision of health care declines?  It was never about health care anyway.

Saturday, December 20, 2014

The Defined Benefit Hoax

There has been a long standing debate about which pension plan is best for workers -- "defined benefit" or "defined contribution." 

A db (defined benefit) plan is like the US social security plan.  It simply promises to pay specific amounts of money defined by worker income history and other data.  The issue of where the money comes from to fund the promises is left hanging.

A dc (defined contribution) plan is like an IRA plan.  It receives contributions during working years.  Those contributions are invested.  Ultimately, the contributions plus their accumulated earnings become available for retirement or for any other purpose (such as bequests to the next generation).

The real difference between these systems is that a db plan can become "unfunded," while a dc plan cannot become "unfunded" (by definition).

Supporters of db systems have always claimed that such plans (most public employee systems such as those for public school teachers and state and local government employees are db plans) are "guaranteed."

Detroit public employees recently found that the "guarantee" is nonsense.  All db plans can have the benefits revised or eliminated, contrary to what supporters of db plans claim.  As everyone knows, social security will never be able to pay the benefits currently written into law for future beneficiaries.  Huge, largely unexpected, benefit cuts await most future social security recipients.

In today's Washington Post, Michele Singletary, an outstanding financial advice columnist, notes that Congress last week formally opened the way to cutting db benefits for multi-employer db plans: "Tucked into the federal spending bill were provisions that allow certain struggling multi-employer pension plans to reduce benefits already being received by retirees."

Read that last sentence again.  For folks already retired, this new law allows the plan to cut payments.

So much for the main argument for db plans.  When the money they are supposed to provide is needed for retirees, they, like Lucy, can simply pull the football away and let Charlie Brown kick the air.

Db plans were built on a foundation of hope, optimism and misrepresentation.  Only dc plans will be fully funded.  Those who expect to survive on db plans will be disappointed (and impoverished).

Friday, December 19, 2014

The Cuba Opening

President Obama has moved to "normalize" relations with Cuba.  This is a good idea.

But, in a bold admission, the Obama administration admitted frankly that sanctions have done no good in Cuba.  They have not only done no good in Cuba, but are doing no good in Iran or Russia as well.  Sanctions are a poor substitute for a serious foreign policy.  Sanctions are easy to violate and usually constitute a very loud admission of weakness by those imposing the sanctions.  So let's end sanctions -- in Cuba, Iran and Russia.

Trade with Cuba, a tiny country with less than 12 million inhabitants and a pygmy per capita income (variously estimated between $ 7,000 and $ 18,000 per capita), is not going to move anyone's needle.  But trade is almost by definition a win for everyone.  So, we should not only deal diplomatically with Cuba, we should trade freely with this small island nation.

Trade restrictions always have unintended consequences. We should have no trade restrictions, excepting products that are directly related to national security concerns.  Letting Coca Cola and McDonalds operate in Cuba, Iran and Russia makes good sense and should not be prohibited.

Monday, December 1, 2014

What The Drop in Oil Prices Mean

Oil prices are collapsing and that will change things.

Countries like Russia, Iran and Venezuela are finding out that fortune quickly turns to misfortune, when your economy depends overwhelmingly on a single natural resource.  Similarly, areas of US economic growth -- Houston, for example -- may be in for a time of anxiety.

Decisions made at $ 110/bbl look problematic when oil falls below $ 70/bbl.  It is not all good news.

The main recipients of good news are oil consumers -- which includes most folks.

But decisions made that depend upon incorrect future information destroy resources.  Think about investments in "alternative energy." Are these investments worth anything at the current barrel price of oil? Wind and solar energy look even more ridiculous now than they did just a few months ago.  How about "energy efficient" transportation?  The government's subsidies of "alternative energy" can now be characterized as money poured down the drain.

For an economy as weak as the current US economy, the struggles of the oil industry could put a huge damper on the economy.  The only bright spot -- technology -- could be threatened by the demonic regulatory agenda of the Obama administration.

Meanwhile, Europe is weakening and the emerging markets are getting crushed.  Not a pretty picture.