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I've written a few posts involving former banking sector analyst-cum-banking sector fund manager Tom Brown. Most notably here, here, here and here. He appears on Bloomberg with distressing frequency these days. Just like Bob Albertson- both long in the tooth banking analysts, though Brown is really now a banking sector fund manager. As such, as I noted in one of those posts, when he appears in his analyst role, he's effectively shilling for his own fund.
In that first linked post, I noted that Brown said, in an early June interview, that he'd recently gone long BofA for his fund.
How's that working out, Tom?
Let's see, the market's been whipsawed, banks have been bloodied. What line do you think Tom Brown is peddling this week?
You see, as you'd expect, Brown was on Bloomberg this week exhorting investors to buy more BofA, despite it's getting hammered far worse than the other three remaining large US commercial banks, as indicated in the nearby chart.
It was pretty sickening to hear and watch Brown dance his way to a conclusion that investors would be smart to buy BofA after the pounding it's recently taken. But, without more suckers buying it, how's Tom ever going to get his own position, now down something like 40%, back into the black? Wouldn't you like to be one of Tom's fund customers, opening your quarterly statement in a few weeks, after Brown bet so much on his favorite bank?
As I suspected, the price chart indicates that the smartest move would have been to just stay with the S&P500 and avoid the bank stocks recently. And probably for the foreseeable future, as well.
Incredibly, Brown's excuse....err.....reason for buying BofA now is that it's reward/risk is far higher than it was recently, because so much risk is gone now that it's price has sunk so low. He hurriedly mentioned something about 'sure revenues will be lower, but, gee, that risk is so low.....'
To continue the old Wall Street maxim,
'If you liked it at X, you'll love it at less than X, and marry it even less'.......I think Tom Brown's having children with BofA as it's down 40%.
You can't make this stuff up, can you?
I haven't written many posts involving Kodak. The first, in 2007, contended,
"The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google."
IBM seems to have averted death, although it's hardly a 'tech bellwether' anymore. But Kodak and Xerox are now just, well, also-rans in every sense.
The two posts I've written solely on Kodak, here and here, from late 2009, opined that the firm should just dissolve itself. In that second, most recent piece, I wrote,
"The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.
You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?
Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return."
Yesterday's Wall Street Journal featured the firm's failing fortunes on its front page. With the recent equity market gyrations, Kodak's market value has now fallen below what many observers believe is the value of its patent portfolio. Amazingly, that market value was now less than $500MM.
The nearby price chart for Kodak and the S&P500 Index over the past two years, just about when the KKR financing deal was struck, paint a catastrophic picture.
Despite CEO Perez' comments about remaking Kodak into a printing giant, the firm has lost half its value while the S&P posted modest gains. Meanwhile, KKR is sucking out those nice 10% interest payments.
I was shocked to read in the Journal piece that one of my most admired businesspeople, Rick Braddock, is an outside director at Kodak. At least he qualified his commitment to the firm's "turnaround" by adding,
"I am not going to rule anything out."
If that chart is Perez' idea of a turnaround, I'd hate to see his notion of failure.
According to the charts accompanying the Journal's article, sales at the firm have fallen from slightly over $10B in 2006 to an expected less than $3B this year. Kodak lost money in each of the past three years and is forecast to do so again this year.
Can there really be that much juice in a hoped-for dominance of printers to justify these losses? The PBGC will have to absorb what Kodak can't fund, Chapter 11 or not, so that's moot. The question has to be whether the present value of the still-to-turn-a-profit printer business really can exceed that of the firm's patent portfolio, assuming, of course, Kodak will have enough cash to make it that far.
As I did in 2009, after reading of Perez' sellout of shareholders to KKR, I continue to believe that Kodak's senior management and board are acting at cross purposes to their shareholders' interests.
If you were watching CNBC this morning just after 9AM, you saw an amazing interchange between Melissa Lee, David Faber, both veteran television anchors, and wannabe-cable anchor Jim Cramer.
I have tremendous respect for Lee, as well as her free-market leanings. I'm okay with Faber- his occasionally-revealed political sentiments are too liberal for me, but as a reporter and anchor, he's good.
So to the story......
Lee reported the news that Reuters had reported that an unidentified Asian bank had withdrawn its credit lines to/with SocGen, the large, key French bank. She stressed that the story was public on Reuters, and apparently roiling European markets, but the actual credit line act was both unverified and anonymous.
At that point, Cramer jumped in and, to paraphrase, said, with this worried, gravitas look into the camera,
'David, as a financial journalist, as you and I were in 2008, commenting on the financial crisis, we want to be careful that our reporting doesn't further provoke a crisis, don't we? We don't want to be the acetylene torch to a situation....'
First, one observes that Cramer insinuated himself into the front rank of financial journalists. Hardly something I think the broader market would embrace. I don't think Faber was particularly happy about that.
Further, Faber was clearly spooked when the camera cut to him, and bluntly retorted, again, to paraphrase,
'I'm not going to go into a discussion on reporting and journalistic ethics right now....'
He then observed that reporters always have to judge the wisdom of reporting facts which might cause further reactions.
At this point, the camera cut to an interesting shot- side-by-side separate videos of Lee and Cramer, although they were sitting adjacent to each other. It was sort of odd to see one's arm slip into the other's screen.
But it's clear the producers must have directed this shot and then quickly coached Lee to take control, because she looked right into the camera, not at Cramer, and said, again, to paraphrase,
'Our policy is to report news stories which are public and affecting markets....and the Reuters story about SocGen meets those criteria....so it's clearly something to report....'
Lee's verbiage sounded like it was taken nearly verbatim from either come CNBC policy memo, or had been crafted on the spot and fed into Lee's ear.
Lee's face, while delivering this, was not happy. Her tone was just a hair shy of publicly lecturing Cramer to keep his mouth shut about what they were covering on the air.
It was as if Cramer had broken the 'fourth wall' of the video medium, acknowledging the effects the anchors' delivery of bona fide stories could trigger in viewers. But, more than that, Cramer was not-unsubtly suggesting that he, Cramer, had to be careful because of who he is.
Personally, most people I know think he's a hot-headed buffoon. Could it be that Cramer's sudden concern with the consequences of his remarks constitutes his attempt to atone for the years when, as he has publicly acknowledged, he shamelessly manipulated CNBC floor reporter Bob Pisani to report as stories rumors Cramer originated to get stocks to run toward his positions?
Hopefully this morning's little incident is a shot across CNBC's bow to reconsider grabbing Cramer to fill in for their depleted on-air ranks since Erin Burnett's departure and Mark Haines' death.
Just a little over a month ago, on July 7th, the Wall Street Journal's Money & Investing section had, as its lead headline, "Highflier Tells Clients to Wait."
It seems that Alphonse Fletcher, said to, have "made a splash on Wall Street in the 1990s, reporting 300%-a-year returns at his firm," and "told of going 11 years without a single losing month," may have bamboozled three Louisiana public union pension boards.
Fletcher made them an offer, so to speak, which they could not refuse- "an investment assured of returning 12% a year."
When asked by the three pension boards for the return of their money recently, Fletcher "sent them promissory notes "in satisfaction of this redemption request" that pledged repayment within two years."
And you wonder why we have underfunded public pension funds? Who even knows who sits on the investment committees of these three Louisiana state public union pension funds? Somehow, I am guessing not people with requisite experience relevant to and adequate for the task.
Apparently it's not even clear just how much money Fletcher's fund complex actually runs. The Journal alleges that it is probably close to $200MM, although Fletcher, by double-counting amounts that one fund invests with another within its complex, gave a figure of some $500MM.
The story reads like Hillary Clinton's legendary gains from funds managed by "Red" Bone. In that case, Red essentially decided, after the fact, where Hillary's money had been that period, and credited her account thus.
Between the guaranteed minimum 12% return and the many cross-feeds of funds from one element of Fletcher's complex into others, one gets the sense that the same scheme was afoot in this recent case.
In the Journal's July 16-17 weekend edition, it updated the Fletcher saga. By then, all three Louisiana unions' pension funds had requested the return of their total investments of $143MM. This sum would seem to be the bulk of Fletcher's investments, if the Journal's earlier-stated, $200MM figure is close to correct.
The articles made for interesting and, frankly, fun reading. As I read each subsequent paragraph, I grew more curious as to who could possibly be so stupid as to invest so much public union pension money with a manager who promised- promised- a minimum return of 12% per annum. That's more than the S&P averaged before the recent flat decade.
Mind you, we're not talking about Steve Cohen or Jim Simons. Fletcher was described in the earlier article as a once-promising equities trader at Kidder Peabody who sued over a bonus dispute and for racial prejudice. He was involved in another racially-based lawsuit with the prominent New York city co-op, the Dakota.
Honestly, it reads like something out of a Tom Wolfe novel (Bonfire of the Vanities) except, sadly, it's all true.
I believe it was Forrest Gump, who hailed from the same general region, who said,
"Stupid is as stupid does."
Now, ask yourself, how will more federal financial regulation stop the idiots in Louisiana in charge of public union pension money from making more stupid mistakes like this in the future?
I suppose I could have written a post yesterday to bemoan Monday's sharp selloff in the major equity indices. But then I'd have missed being able to add to this post yesterday's partial recovery, and today's resumption of Monday's panicked selloff.
Where to start?
First, the most recent S&P closing high was 1345.02 on Friday, July 22. It remained above 1290 for the next trading week ended July 29, then headed downward with gathering speed last week. After the so-called debt debacle. But before the S&P downgrade.
But right after the weekend after that Friday's government's release of the recent, appalling GDP growth numbers on the 29th.
Then, throughout last week, Europe's sovereign debt crisis continued to build, finally encompassing Italy, Spain and France by the middle of this week.
Then, yesterday, you had the Fed's uncharacteristic and deeply troubling announcement that henceforth, for another two years, rates will be held at current, effectively 0% levels. First equities plunged at the admission by Bernanke of a probable continuation of the recession, followed by bottom-fishing and short-term joy at more cheap market funding, courtesy of Helicopter Ben.
Then, today, sober realizations set in that, from a global perspective, everything basically sucks, except for risky timing plays.
Ben has essentially trumpeted a cheap dollar policy, which is bound to fuel price rises, as well as technically-defined inflation. Meanwhile, the US economy continues, will continue to struggle.
By waiting until now, Wednesday afternoon, to write this, I've also enjoyed hearing a lot of stupid remarks from so-called pundits.
For example, former Goldman bank analyst, now, many years later, with Sandler O'Neill, Bob Albertson, on Bloomberg Midday with Tom Keene.
Frankly, Keene is typically smarter in his choice of guests. Albertson's really gone off his game lately, along with Tom Brown. This afternoon, Albertson evidently believed he is now an accredited macroeconomist, as he solemnly held forth on the need for an infrastructure bank to re-employ millions of idled Americans.
Well, Bob, I'll let you in on a little secret. Congress has been funding road building for decades! It never ends. And, by the way, Bob, unless you want us to build infrastructure the way Hitler built the Autobahn- with former white collar men using picks and shovels- modern infrastructure construction actually requires a fair amount of capital equipment and skilled workers to operate same.
Where do you think all that new capacity is hiding? Didn't we just have it all busy on the Great One's "shovel ready"stimulus projects?
At least Albertson came to his senses long enough to rail against more borrowing and taxing an increasingly unemployed private sector.
Meanwhile, yesterday morning, presidential economics advisor Gene Sperling's first concerns amidst Monday's market plunge was that the federal government has to, again, extend unemployment benefits "to help job creation." He actually said that- I'm not making it up.
Meredith Whitney, as usual a font of sensibility and good insights, shook her head while lamenting that sentiment this morning on CNBC.
A little later, on David Faber's noontime program, Ron Insana, a CNBC Contributing Idiot and former full-time empty suit on the markets, weighed in by solemnly decrying federal spending cuts just when the economy needs a boost.
Really? Ron, have you bothered to notice that about half of every dollar of that precious Keynesian federal spending you so cherish is borrowed? Then repaid from higher taxes with interest? What, precisely, is wrong with letting consumers keep their money and choose to spend or invest as they like? You know, the sort of behavior that drives genuine economic recoveries and expansions, instead of government-pumped flashes in the pan, like what we've seen for the past three years?
He also derided 'animal spirits,' declaring that there was just no way the US economy can recover by relying solely on private sector growth or savings. Nope. Gotta be federal borrowing from China to spend on unionized labor projects or transfer payments to the idle or retired..
As for my equity portfolios, they've done extremely well. While I've read of some horrendous losses among fabled fund managers like Brucke Berkowitz and Bill Miller, my portfolios fell less or about as much as the index on Monday, rebounded more yesterday, and are falling less today, maintaining a total rough 10% point premium above the S&P. From what I read, quite a few fund managers loaded up on large US financial equities in the past year or so.
I can honestly say, from my many posts on those sorts of firms, "I told you (not to do) so."
Honestly, what are managers like that thinking? Going after financials on some subjective trailing P/E basis or some other similar nonsense? Serves them right to take double-digit percentage losses this month for being so foolish.
My signals do not yet show that it's time to go short if you are a long-term equity investor. Yes, it's a rough few weeks. Yes, there's a growing sense of global economic trouble, over-leveraging, slowing growth and sovereign debt problems. Even a probably continuation of a recession that never truly ended in the US by all measures.
But that doesn't mean it's yet time to sell well-selected equities.
I had the occasion to reread Michael Lewis' 1989 classic book about investment banking and the first mortgage crisis, Liar's Poker.
A good friend had recently finished Lewis' Moneyball, the book he wrote about baseball team managements' use of key statistics to select and pay players. Somehow we got onto the subject of his first book, and I lent him my copy.
Upon his returning it to me last Thursday, I began to selectively reread it. Not being the sort of book that I reread often, I hadn't actually opened it, to my knowledge, in 22 years. Thus, many of the passages were quite surprising.
To give some perspective regarding some of what I recalled, thanks to the aid of Lewis' book, let me recount a story from my business youth. Back when I was in Corporate Planning at Chase Manhattan Bank, troubleshooting businesses as one of a few elite internal consultants working for Gerry Weiss, I would often be immersed in a project for months. After its completion, I'd tackle the mountain of BusinessWeeks, Fortunes and Forbes magazines which were routed through the group. What I found typical at that time was that headline issues and stories, read several months later, invariably had developed almost completely opposite of the then-breaking stories. Headlines, read 3-4 months later, often seemed ridiculous.
And so it is with the recent mortgage-originated financial debacle, thanks to Lewis' book.
First, it surprised me to relearn that Lew Ranieri's mortgage research department at Salomon was novel at the time. And that, given the prepayment option embedded in every mortgage, they had been shunned by investment banks for their unreliable duration characteristic.
Second, there had been just one CMO originated and sold before the guy who actually authored the mortgage-backed origination and trading business, Bob Dall, got the green light from Gutfreund & Co. to open for business.
Third, Salomon spent large sums on lobbyists to get Congress to enact federal legislation, overriding state laws, making it legal to issue bonds collateralized by mortgages. Further, Salomon persuaded Congress to allow government-backed mortgages to be so used. This was supremely important, because with FNMA insurance, buyers were assured that defaulted mortgages would be made good by the federal government.
Reading the evolution of the mortgage-backed business, the first time, through Lewis' telling, it's stunning to recall that from 1981-86, now approaching 30 years ago, the first mortgage boom was largely missed by First Boston (where current BlackRock CEO and founder Larry Fink was merely the head of its mortgage-backed business), Morgan Stanley, Kidder Peabody, Goldman Sachs, et. al. Most of the investment banks which did play a role poached Salomon traders in the latter years of the boom.
Fourth, the sums of money then paid to rising mortgage-backed trading superstars seems laughable now. None of the original trading wunderkinds broke $1MM in compensation for their first few years.
But perhaps the most amazing piece of history is to read Lewis' description of Salomon at its peak. With (don't laugh) a huge equity base of $3B, Salomon was unrivaled among investment banks for its scale, profits and influence. In one of the latter years of its mortgage trading dominance, Salomon's mortgage business had profits which were roughly equal to the rest of Wall Street's investment banks in total!
Here's the funniest part. I mentioned that to a friend on Friday, asking him to guess how much that profit was? He guessed, of course, in the tens of billions. In fact, at the time, around 1985-86, it was about $750-800M.
Since Lewis' book is really about himself, and not just the Salomon mortgage-backed business, it relates much of the story historically. By the time Lewis arrived as a trainee, Ranieri's operation had reached its obese, swaggering, arrogant apogee.
It took Lewis' recounting of the affair to remember how Warren Buffett became involved with Salomon, and the almost perfect parallel with his rescue of Goldman Sachs just a few years ago.
Ronald Perelman, with the backing of Drexel Burnham's Michael Milken, put Salomon into play in September, 1987. Lewis provides an extensive discussion of how Milken's junk bond empire would soon eclipse Salomon's focus on mere mortgage-backed bonds. How Salomon's corporate infighting and inept senior management allowed it to completely miss the junk bond market development until it was too late.
Also woven through the tale is Lewis' explanation of why Bill Simon was passed over for CEO of Salomon when the last family member, Billy Salomon, retired, in favor of Gutfreund, because Gutfreund sided with Billy on never taking the private partnership public. Then Gutfreund sold the firm to Phillips Brothers, a commodity giant, within just a few years. Bill Simon went on to found the LBO movement with a little deal involving Gibson Greeting Cards.
However, back to Buffett. Buffett lent Salmon a large sum to buy out most of the share that Perelman sought from then-holder Minorco, along the same lines as his recent Goldman Sachs loan- a high coupon rate and convertibility to equity at a rather attractive strike price.
That's how Buffett ended up temporarily running Salomon after the Treasury bid-rigging scandal a few years later.
There are many fascinating parallels from investment banking in the early 1980s with the runup to the financial crisis of 2007-08. But there are some important differences, too. Specifically, back in its day, Salomon managed to tower over its less-capable competitors for years as it dominated the first incarnation of the mortgage-banking market. Some twenty-five or so years later, the other investment banks had learned a thing or two, and were much quicker to jump on a developing bandwagon. As were commercial banks.
Thus the wholesale economic disaster that arrived when the federal government, led by Fannie Mae and Freddie Mac, whose involvement in mortgage-backed bonds had been engineered by Lew Ranieri back in the early 1980s, insured the bulk of mortgages, with ever-declining quality standards, which backed bonds sold to investors around the globe.
And, finally, one recalls, after (re)reading Lewis' book, that Goldman Sachs isn't the first and only investment (now commercial) bank which people love to hate. First, there was Salomon. And at the time, nobody could envision Salomon not dominating global investment banking for decades.
It's an instructive and fun reread, or, if you're too young to know of the book, first time read.
Heck, it's only August 9th. Still time to quickly step through Liar's Poker on the beach before Labor Day arrives.
As I listened to this past Friday's dismal job growth numbers and persistent high unemployment, coupled with the prior Friday's dismal GDP growth numbers, it occurred to me that, due to the misleading mythology allowed to grow up around FDR's presidency, the US now seems destined to borrow and spend its way to ruin thanks to empirically discredited Keynesian economic policies.
Let's go back to basic macroeconomics. Before Keynes.
Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier (see also here) theory kicks in,
"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.
Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.
Instead of 10% more materials each year to make my products, this year, I need only 5% more.
My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.
While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.
Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."
Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.
Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.
Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.
But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.
We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.
The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.
The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.
I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.
Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.
So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.
What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?
If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?
This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.
I could scarcely believe what I heard and read in the past day or so concerning Irene Rosenfeld's new plan to split the Cadbury-dominated snack foods of the post-merger Kraft from its groceries business.
I wrote these two posts, here and here, in September of 2009 and January of 2010, respectively.
Consider this passage from the first linked post,
"Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,
"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."
Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.
With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.
After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?
If anything, Stitzer is really making the case, by omission, for another approach entirely.
Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?
That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.
It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage."
And, then, this one from the second linked post,
"I still believe, as I did last September, that both parties would have benefited from Rosenfeld's selling Kraft's businesses which resemble Cadbury's, to the latter, taking equity in exchange.
Cadbury is simply a better management team than Kraft. If anything, I guess Cadbury shareholders should thank Stitzer and the board for getting top pound for the company, and walking away with cash after selling whatever Kraft paper they receive, while Kraft will be stuck trying to make this dubious tie-up pay off."
Funny how that worked, isn't it? A former Cadbury shareholder could soon repurchase the old Cadbury, plus some similar Kraft businesses, with the premium they received.
However, looking at the nearby price chart of the S&P500 Index and Kraft for the past two years, it appears that Kraft actually outperformed the Index. Probably on account of Cadbury, since Kraft was underperforming the Index for the five years prior to the acquisition, and still headed downward.
According to this morning's Wall Street Journal article, Rosenfeld had the idea to buy Cadbury, bundle the snack businesses, then split Kraft, as long as several years ago.
Even if true, this is corporate ego and obsession with power at its worst. The story would mean that Rosenfeld squandered Kraft shareholder money on the Cadbury premium, and on investment bankers, just to get to the point of now spending more money to split up the swollen Kraft.
Wouldn't it have been simpler and cheaper in the first place to have just approached Cadbury's Stitzer about such a combination? Rosenfeld could then have declared a special stock dividend of Cadbury shares received for the Kraft snack businesses sold the the British confectioner.
To believe that Rosenfeld's approach made more sense is to be caught up in the sort of wilderness of mirrors which can occur in large corporate managements. A lot of extra expense and effort just to allow Rosenfeld to appear to be the empress of a larger set of businesses, only to separate them once more.
One thing is true, though. According to my proprietary equity research, splitting the slower-growth grocery businesses from the higher-growth snack businesses will, indeed, allow the latter to deliver a consistently higher total return to their shareholders. The combination has certainly punished the latter, while investors price Kraft to an average that accounts for the former.
Thus my point that it made no sense to effectively destroy or mix value from Cadbury into Kraft in the first place.
I saw an excellent example of local government services waste earlier this week.
As I walked through the lobby to leave my fitness club, I saw through the large windows that a paramedic ambulance was parked outside the main entrance. This occurs occasionally when someone has been injured or suffered a medical problem while exercising.
However, parked nearby was not one, but two local police cars. And, as I drove out of the parking lot, yet another emergency medical vehicle was pulling up to the building.
Being of a certain age, my immediate thought were the lyrics from Arlo Guthrie's Alice's Restaurant, which I can't quote, because of copyright issues making them unavailable online. But, to paraphrase,
'The cops were busy using all their cop equipment which they never get to use otherwise.....'
You see, the towns out my way in north-central New Jersey have very little violent crime. Or much crime at all, for that matter. Getting onto a local police force in any of these towns is the equivalent of being paid to drive a car all day while listening to the radio. Oh, yes, and they get to carry guns to intimidate the citizenry. Let's not even discuss what their pensions will be after a mere 30 years, likely without ever drawing a weapon.
So seeing two police cars with four members of the local town's police force visiting a fitness club for someone's medical issue was more than just over the top.
It's emblematic of our society's overspending nanny-state nature.
Meanwhile, taxpayers footed the bill for the needless police time and expense, and probably the extra medical vehicle, as well.
One wonders how much of the local police budgets are padded for staff to handle unnecessary calls of this nature.
It's a small, simple story of local government excess, purchased with tax dollars. But multiply it thousands of times, many days per year, and you get some idea of why our society is costing ourselves so much more than it did mere decades ago.
Are you as sick as I am of hearing, courtesy of the recent federal debt limit debates, that 'big/rich corporations should pay more/higher taxes?'
I don't think I could watch CNBC or Bloomberg for the past month without hearing some Democratic Congress member, the president, or a liberal pundit repeat some variant of that old saw.
Trouble is, it demonstrates complete economic illiteracy by those who mouth those sentiments.
Harvard economics professor Greg Mankiw wrote in his blog, borrowing from his textbook,
"But before deciding that the corporate income tax is a good way for the government to raise revenue, we should consider who bears the burden of the corporate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.
Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall.
The corporate income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters."
While I have grown weary of federal elected officials of both parties displaying their economic ignorance, even as they dangerously legislate tax policy, I fault even more the business network pundits who continue to spout this nonsense without correcting the fallacy that corporations really pay any tax at all.
Ultimately, as Mankiw explained, it's taxpayers, either as company owners, consumers, or employees.
I read with interest the recent headlines that two investment funds have bought comparatively large stakes in McGraw-Hill with the aim of forcing it to break the firm up. It couldn't happen to a nicer plutocratic empire.
I've written several prior posts concerning the firm here. I recalled that I wrote this piece, noting the brief inclusion of the firm in my equity portfolio, but not that it was almost five years ago.
The intervening years have not been good to or at the firm. Thanks to Terry McGraw trying to pump growth at S&P's ratings unit on the cheap, the firm's fortunes soured in the immediate aftermath of the late-2008 equity markets collapse.
Since then, it's about paced the S&P, but that leaves it with a -20% return over the five year period, while the index has finished flat.
With its largely unrelated ratings, educational and other publishing unit, and equity data subscription business, the firm has been an unwieldy conglomerate for decades. Much like GE, it has long since lost any reason for its integrated nature.
Except, of course, the ability to employ various McGraw family members and fuel their increased wealth.
My own experiences with S&P's equity data unit have exposed that business as poorly run. Customer support from the technical people is superb, but the sales and administration are abysmal, with those employees rarely knowing what's going on with customer accounts.
A few years ago, I mentioned a particularly vexing problem to a senior executive who is also a McGraw family member. There was never a reply, indicating, evidently, a sort of supreme disconnect between the family member employees and the real operations of the firm.
It doesn't surprise me that some outsiders have detected an opportunity to buy the firm's shares now, at what they believe to be a lower value than that of the pieces of the firm, once separated. Nor does it surprise me that Terry McGraw issued a typical corporate-speak response.
But, again, like GE, non-performance is a tough sell. GE has finally begun to unravel, with the entertainment properties that Jack Welch mistakenly acquired having been sold to Comcast.
For McGraw-Hill, it's not a stretch to see the publishing pieces sold to larger competitors, or just split off, while the ratings and financial data units also go their separate ways. Leaving, I suppose, the McGraws to count their money as they gather in either the compound up in Connecticut or their place in the Adirondacks.
Like many companies long-identified with a family still involved in the firm, McGraw-Hill looks like it may be at that point where saner, smarter heads prevail and relieve the family members from making more management mistakes.
This past weekend edition of the Wall Street Journal featured an excellent editorial by Prof. Richard Rumelt entitled World War II Stimulus and the Postwar Boom. Rumelt is a professor of business at the UCLA Anderson School of Management.
Much as Amity Schlaes book, The Forgotten Man, corrected many of the economic myths which had grown up around FDR's failed Great Depression programs, Rumelt's piece highlight the real source of US economic growth during and following WWII- forced consumer savings, not government spending.
Rumelt begins his piece by observing,
"Despite two years of fiscal and monetary stimulus, the U.S. economy is sagging. This has renewed the argument over the usefulness of more stimulus, and many of its proponents make an analogy to World War II.
Last month, former Obama adviser Larry Summers put the case this way: "But for Hitler and the military buildup he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent and with the recovery promise of the New Deal shattered." And in 2008, Princeton's Paul Krugman referred to "the enormous public works project known as World War II."
This is received wisdom to many economists and historians, but it skates around key facts of the World War II economy. Chief among them: Government policy didn't stimulate personal consumption, as Keynesian policy makers aim to do today, but rather enforced thrift.
During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. That meant significant portions of the massive government spending went toward saving and private debt repayment. Thrift restored personal balance sheets, ultimately setting the stage for the postwar boom."
Those are the themes of Rumelt's editorial. Here are some of the supporting data he cites regarding his theses,
"In 1939, before the U.S. entered the war, about 15% of the work force was unemployed. The war eliminated unemployment by moving 11% of workers into the military, where they were indentured at low pay with little ability to purchase consumer goods. Another 5% were directly employed by the government as military support personnel.
As the military swelled, the civilian work force declined to 53.9 million in 1945 from 55.2 million in 1939. A shrinking civilian work force and surging government demand created wage inflation of about 5% per year. Higher wages, plus about 20% more hours worked, generated a 65% increase in real (inflation adjusted) national disposable income between 1939 and 1945. But, remarkably, total consumer spending did not rise to match these higher incomes. During the 1941-45 war years, over 22% of disposable income was saved.
This high saving rate was driven by fiat. Thanks to wartime rationing, Americans were only allowed to purchase small amounts of sugar, butter, meat, gasoline, tires, shoes, bicycles, processed foods and other goods. Plus, there was virtually no production of new cars, radios, home appliances or housing. In fact, when inflation and increased working hours are taken into account, consumption per hour worked actually declined for the bulk of civilians during the war. Civilian living standards stayed at Depression-era levels.
Americans' wartime savings over 1941-45 were $142 billion, about $1.3 trillion in 2005 dollars. These funds went to pay down consumer credit, buy War Bonds, and bulk up savings accounts. During the war, outstanding consumer credit fell to $5.7 billion from $7.2 billion, a 44% reduction in constant dollars.
Despite higher incomes, household mortgage debt rose only slightly during the war, falling by 17% in real terms. As a consequence, the overhanging debt that had plagued households since the start of the Great Depression was dramatically reduced and household balance sheets markedly improved.
When hostilities ended in 1945, many expected that an expanded civilian work force, plus reduced federal deficits, would bring back the depression of the 1930s. There was indeed a brief recession in 1946, but as production was rededicated to consumers and rationing was lifted, people rushed to replace rusted-out automobiles and broken-down refrigerators. The returning soldiers got jobs, moved to newly constructed housing in the suburbs, and the postwar boom was on. And it was greatly accelerated by households' renewed capacity to take on debt.
Consider the ratio of household debt to disposable income over the decades from 1919 to 2010. Data (from the Federal Reserve Flow of Funds, the Bureau of Economic Analysis and other historical records) show that the debt ratio started a sharp upswing in 1920-22 with the 1920s housing boom and the introduction of consumer financing by auto makers and producers of home appliances, rising to 41% in 1929 from 16% in 1919.
As the economy dipped into recession in 1930, household incomes fell and people made dramatic reductions in spending for consumer goods in order to hold onto their cars and homes. Falling incomes forced the debt/income ratio to a peak of 61% in 1932. By 1940, the ratio had slowly worked its way down to 40%, about where it had been in 1929. Then, with the advent of the war and rationing, the ratio plummeted to 20% by 1944-45, a level not seen since 1924.
Today, households carry a much greater relative debt burden than they did in 1929, largely due to a 25-year mortgage binge. Between 1980 and 2007, disposable income grew at 5.9% per year while household indebtedness grew at 8.7% per year—a clearly unsustainable situation. As in 1939, this hangover of debt blocks new rounds of consumption and dulls the impact of fiscal and monetary stimuli."
Stunning figures, are they not? I'm in my fifties, so I recall my late father's stories about "life during wartime." The gasoline rationing, lack of tires. Buying black market aviation gasoline which burned out the cylinders in his used car. The stories of meat, butter, sugar and egg rations. It occurs to me that my own children know nearly nothing of those privations for almost half a decade in the early 1040s.
Rumelt then turns to Summers' folly, explaining what emulating WWII's approach to economics would actually mean in today's environment,
"If one wanted to replay the economics of World War II (without the war), it would mean high consumption taxes aimed at the middle class, and putting 30 million Americans to work at minimum wage or less. No serious politician could put forward such a plan.
The difficult truth is there is no easy cure for the present hangover. Myopic policies allowed credit to be pushed over its natural limit. Credit expansion shifts consumption from the future to the present, but the future has now arrived. Policies aimed at reigniting the credit-driven consumption boom of the last 25 years won't work.
Instead of looking for a pre-election year pop, it would be wiser to focus on transitioning from credit-driven economic growth to growth that is, once again, driven by new productive investments. The key policy aims should be removing the tangle of tax, policy, regulatory and human-capital impediments to domestic private investment."
Which brings to mind, for me, this post from last Friday. Imagine! Actually encouraging people to save for purchases, rather than simply borrow for immediate gratification.
On that latter point, as if summoned by my writing this post on Monday afternoon, as I finish this, I hear Paul Krugman on Bloomberg television haranguing for, of course, more federal borrowing, higher taxes, and more spending in the face of economic softness.
Like Summers, Krugman apparently was absent from economics school the day they taught the theory of economic cycles. You know, how economies naturally move through recession, recovery, expansion, slowing, then recession again.
Trying to slice off the unwanted slow and recessionary phases, in order to have only expansions, just isn't feasible. No matter how much money government prints or borrows.
Instead, as Rumelt notes, what actually leads to robust expansion in a mature economy is capital formation based upon savings, not endless borrowing and government budget deficits.
The much-anticipated US government's formal news release of GDP for Q2 and revised Q1 came with disappointing data:
"Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."
And on prices and spending,
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.
Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first."
Over on Bloomberg television, Tom Keene said he thought the Q1 revision was a typo when he first saw it. The GDP data provided an explanation and, probably, a good reason for the fifth S&P500 down day last week. From 1345.02 the prior Friday to 1292 and change on the last trading day of July, the equity index reflected ongoing US broad economic difficulties.
Recall, if you will, the administration's robust 4% annual GDP wishes-as-forecast. We're a long, long way from that.
While the government debt limit and spending cut drama continues to play out, one would be forgiven for seeing the GDP, price and weakened Q2 spending data as more lasting, deeper reason to doubt whether the US really ever exited from the recession begun in 2007.
Still, this need not mean a plunging S&P500. The larger global US companies comprising the index continue, in the short run, to profit from economic growth elsewhere in the world, with more favorable business conditions abroad than at home.
Not that even this will last indefinitely. But until deleveraging makes more progress in the form of reduced expecatations of government pensions and benefits globally, and subsequent higher personal savings rates and lower consumption, US equities may remain attractive.
In yesterday's post I discussed my views on the stupidity of every major nation's defined-benefit pension and/or healthcare schemes over the past 120 years, beginning with Germany under Bismarck.
Doug Dachille, a fixed-income maven and occasional guest on CNBC, has articulated several times that overly-indebted governments have a choice between whom they will disappoint/stiff.
They can default on their bonds, being legal debt obligations, in order to favor citizens who vote for members of the government. Or they can pay their bonds and enact combinations of more/higher taxes and benefits cuts for citizens.
A Wall Street Journal editorial in Wednesday's edition echoed Dachille by pointing out that there is no real need for a default, regardless of what happens by August 2nd or, potentially, the date on which Congress recesses for the summer, August 8th.
That is because there is more than sufficient tax revenue every month to pay the nation's debt interest.
Therefore, to Dachille's point, thanks to badly-designed and overly-optimistic social welfare programs passed by less-than-stellar intellects in Congress throughout the last eighty years, the more logical solution to America's spending and debt problems is to cut benefits in these programs.
Yesterday, on CNBC's noontime program, David Stockman was enlisted to push the network's liberal agenda. A perennial favorite of the network's due to his combination of serving in Reagan's administration, but actually being a big-tax-and-spend liberal, Stockman didn't fail his hosts. He immediately decried the current debt limit debate as really about deficits, which, of course, require new and higher taxes to close them.
He then bemoaned, several times, that Senate Democrats had regrettably and inexplicably thrown in the towel on demanding new taxes.
Apparently Stockman isn't familiar with Hauser's Law, or the fact that federal tax revenues as a percentage of US GDP average 18% over the long term, no matter what the composition of tax rates and bases.
Amazing as it may be, Stockman, too, confuses tax rates with tax revenues. He evidently continues to fail to understand that lower rates, which accommodate economic growth and higher GDPs, lead to higher total tax revenues on lower tax rates.
On Greta Van Sustern's Fox News program Wednesday night, GOP House Budget Chairman Paul Ryan discussed the current debt limit debate, noting, in answer to a question from the program's host, that various national debt estimates don't typically include the off-budget programs such as Social Security, Medicare and Medicaid. Further, he explained, those aren't like bonds which have been issued, and must be retired. The terms, conditions and costs of the entitlement programs can be changed and, thus, do not represent formal, fixed claims on the federal Treasury.
While some US states, such as Illinois, California, Michigan and New Jersey, pre-Christie, may flirt with defaults, exhibit government denial of their inability to tax their way out of their fiscal nightmares, and, ultimately, appeal to the federal government to bail them out, the US government has no ultimate guarantor.
It doesn't take a genius to see that fixed debt obligations in the form of bonds will have to be honored and serviced.
Given that tax receipts can't be expected to rise above about 18% of US GDP, the growth of which has been anemic due to recent newly-increased levels of federal spending and regulation, the only remaining variable in the equation to eventually shrink the US federal deficit has to be spending.
Quaint Washington games like automatic 7%-per-year baselines budget increases have to be ended. Eventually, Social Security, Medicare, Medicaid and all other off-budget programs should be brought on-budget, to reflect a consolidated balance sheet of federal liabilities.
Perhaps only then will most voters finally understand that they have allowed their elected federal officials, for some eight decades, to enact promised social benefit programs which will simply never be payable on a sustained basis.
One only has to revisit the Greek situation, with the many stories and jokes about the short working careers, easy work rules and lavish retirement benefits, to understand that much of the developed world's economies have the same tough challenge ahead- to shrink their once-promised federal-provided social benefits back to affordable levels. Probably involving, at some point, individual defined contribution accounts paid annually out of government receipts, so that there will never be generationally-shifted debts for the consumption of social welfare programs.
A chance remark in a recent Wall Street Journal editorial noted that, just now, as many governments need to borrow heavily to plug budget deficits, many of said governments are finding it convenient to excoriate debt rating agencies and dismiss requirements for using their ratings.
Regardless of how badly S&P, Moodys and Fitch mis-rated mortgage-back structured finance instruments earlier in this decade, or how badly they may err in rating sovereign debt, that chance comment caused me to speculate that global economic growth and debt may be about to reach a tipping point together.
Specifically, with so much borrowing occurring for so much deficit spending among so many nations, while growth among the developed economies has slowed, thanks to ill-advised taxation, spending and regulatory policies, we may well see a sustained period of lower global demand as a result.
The reason for this would be as follows. As governments realize that promised social benefits must be trimmed, they spark a realization among their citizens that savings must rise to offset diminished future government-provided retirement and healthcare subsidies. With government spending reduced, and private-sector spending among consumers reduced to save for future retirement and medical spending, we may well witness a global shrinkage of demand as the final consequence of the deleveraging which began with the financial crisis of 2008.
To me, it seems obvious that after nearly a century of unaffordable social benefit schemes, many governments are now having to rectify those unsustainable promises, cut them, and trigger heretofore unexpected and unseen changes in savings and consumption patterns among consumers across many developed economies. Such economic behavioral changes among consumers may last for decades, and result in permanent changes in savings and consumption rates and, for years, if not decades, slower national economic growth rates.
For, having realized that promised pension and healthcare benefits simply won't be forthcoming as promised by many governments over past decades, individuals will return to pre-mid-twentieth century habits of high savings rates and markedly lower consumption, to prepare for self-financed medical and retirement needs. I believe that will drive discontinuous changes in individual economic behavior not seen in the lifetimes of most economists currently engaged in modeling, estimating and forecasting such behaviors.
My July 4th post concerning America's Porkiest Generation was my first organized plunge into the mess that is the modern global entitlement society in any so-called developed nation.
Among the passages I feel most represent the core ideas of that post are these,
"What astounds and confounds me is that, for forty years, from 1935-75, apparently no economist of standing bothered to note that it was a mistake promise defined benefits, over time, from the proceeds of a national economy subject to the vagaries of recessions, depressions, monetary crises, global competition and occasional wars. After 1945, the same economists should have warned Congress not to use a temporary period of US economic hegemony as the baseline from which to forecast the availability of lavish wealth for decades hence, from which to pay ever-growing defined benefits of health insurance, care, and retirement pensions.
My point for today's patriotic post is to highlight how the generation that deserved credit for fighting and dying to win WWII promptly rewarded itself, through unionism and Democratic control of Congress, by promising itself defined levels of health care and old-age pensions which were never going to be affordable. The mistaken belief that a brief period of unrivaled American economic supremacy would endure and fund such lavish promises should have been challenged and crushed before it could become cemented into the American workers' expectations.
Can it really be that nobody was smart and courageous enough throughout the 1930s-1970s to point out this folly? That no society in history had ever managed the trick of working for about 30-40 years, then being paid near-working wages in retirement for another 20-30 years? That the mechanics of actuarial math and compounding wouldn't sustain those promises without economic assumptions never before seen in global economics?
What a Ponzi scheme, eh? You get control of unions and Congress, you pass laws to promise wildly unrealistic and unaffordable benefits to be paid by subsequent generations, then retire and complain when the next generation realizes what the Porkiest had done.
In my opinion, enacting foolish and economically impossible legislation and promises is no defense to simply stripping them away- now- totally- and reverting to defined contribution schemes."
As I understand it, the original social pension concept originated in Bismarck's Germany before 1900. FDR gave the concept a gigantic push with America's own Social Security program.
To be blunt, Michael Spence's recent Wall Street Journal article observing how Germany engaged in "wage and salary restructuring" for the period 2000-05 in order to attempt to regain some measure of global competitiveness, caused me to wonder whether Germany's social pension scheme has ever really worked? And whether America was profoundly misguided to look at Germany and attempt to replicate its program?
Let's admit that the fundamental reason for such so-called social safety nets is that people living in the most economically-advanced societies, with the highest GDPs/capita, are embarrassed to see people in their 60s, 70s and older going hungry, homeless, or suffering debilitating illness due to a lack of medical care. They instinctively think,
'Gee, our society is so wealthy in the aggregate. Surely we can allocate some money to provide for indigent old people, can't we?'
It sounds good in theory. But, as I wrote in that earlier linked post, consider these aspects of that "solution,"
"When you think about it, most of the intent of dedicated health care and old-age pension benefits have more to do with societally-enforced saving for these needs, and necessarily less to do with societal funding of them.
If all Social Security had ever been was a law to mandate workers and employers to dedicate defined percentages of the formers' wages to individual, single-use accounts, it's not clear that federal assistance would have ever been necessary.
After all, using federal funds to augment such accounts is simply a wealth-transfer from those making higher incomes to those making lower incomes. But if actuarially-determined amounts were deducted from compensation, federal funding never would have been required. Besides, society pays, either way. It's just that when the government is involved, it is taking from some to give to others, rather than have those others behave responsibly and live within their means."
You see, what we're really discussing here is a part of the social compact that nobody wants to, or has, to my knowledge, express simply like this,
'To be part of our society, along with obeying our laws, you must agree to save a socially-mandated amount while you are younger and working, so that the rest of us won't have to support you when you are old and no longer working.'
Instead, that got turned on its head, and became Social Security, Medicare and Medicaid. And now ObamaCare. Rather than force individuals to save from their earnings, in designated individual accounts to fund their post-retirement life, we somehow decided to just promise certain levels of payments to everyone from one big pot, or, really, four big pots now. This had the perverse effect of making people feel wealthy, because the government was going to magically give them defined sums of money when they got old.
How did these people consequently behave from the 1930s onward? Why, they saved less and adopted unhealthier lifestyles, of course, because some disembodied 'government' was going to pay for their older, sicker years. Meanwhile, they bought boats, more cars, second homes, and spent lavishly on themselves while younger.
Now multiply this by several times, to reflect the various economically richer, developed countries in Europe, South and North America and Asia which have followed this model.
See the problem? Actuarially, on a global basis, this concept of government funding defined cash or in-kind benefits for older people, was never going to be sustainable.
By failing to mandate individuals saving sufficiently from their own earnings to fund actuarially-determined amounts, and making clear that no government funds were going to be available to augment these, governments invited hyper-consumption by their populations while working, often including lifestyles leading to higher healthcare costs when retired.
The result is slow-growth, sclerotic European economies overloaded with debt, and America finally reaching its own fiscal tipping point.
Just because Bismarck's concept may have worked for whatever period of time it did, or that it took about 80 years, with periodic fixes along the way, for America's Social Security system to become bankrupt, does not mean those programs "worked."
It simply means that those of us around now to bear the cost of the long term unsustainability of these ill-conceived and -designed programs are the victims of a multi-generational Ponzi scheme.
That's why I see no reason whatsoever why any living American not already on Social Security, Medicare or Medicaid, should be shy about terminating those programs and putting their recipients on defined contribution replacements, funded annually out of tax receipts. With absolutely no time-shifting of funding of any sort.
The whole notion of lavish pensions and benefits appearing magically out of government coffers decades or centuries into the future is just foolish and impossible.
Monday's Wall Street Journal contained an editorial by Arthur Brooks, currently head of the American Enterprise Institute, entitled The Debt Ceiling and The Pursuit of Happiness. In it, Brooks argued that America's current deficit, debt and entitlement woes aren't simply economic in nature- they have have a moral component which involves the erosion and corruption of the Framers' original notions of liberty and freedom in America. Too much guaranteed this and entitlement that have caused people to look to the federal government as the source of their retirement and medical care.
It didn't have to be that way, and never should have been that way. Considering the fraudulent manner in which Social Security, Medicare, Medicaid and ObamaCare have been perpetrated on American voters, there is every reason to simply strip these programs out and move to defined contributions from the federal government's annually fluctuating tax receipts.
Despite various pundits' and politicians' constant claims that Americans currently on these programs "earned" those benefits, they did not. They never paid sufficient amounts of their incomes to fund the lavish benefits they now receive.
We have to redress that fraud now. That's really what the debt limit debate is about. I'll discuss that in tomorrow's post.
