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Rolf Norfolk
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Oxford-educated British IFA, now retired. I've been a bear from the late 90s on, hence the byline "Sackerson" (a famous 16th century bear on London's animal-baiting circuit).
My blog:
Broad Oak Blog
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  • Debt and the State
    I'm going to look at the contention that State debt is the real villain and all we need to do is cut taxes and social benefits, and let business have its head. I don't feel it's quite as simple as that, but please do put me right wherever you see the need.This is an exploratory essay so I'd welcome correction, and further information and ideas.

    First, let's agree that somehow or other, the State has to balance its books (over some cycle of time, to allow for recessions), because ever-increasing debt ultimately leads to ruin. That seems intuitively obvious.

    So, how bad are the government's debts? Here's a graph of the official annual figures for the 58 years ending last December:



    That looks dramatic, though the very steep slope in the last couple of years is atypical because of attempts to deal with the post-credit crunch economic crisis. Now let's see it in the wider context of GDP:



    For the Federal government's "real" (GDP-adjusted) debt, the lowest point is in 1974, then a few years later, starting around 1980, the debt begins to rise significantly, doubling from its low by the early 90s. After that there's the boom of the later 90s, the bust of the 2000s disguised/mitigated/deferred by monetary easing, and the reckoning of 2008 onwards. (The final slope looks much as it did in the previous graph, since the economy has stalled.)

    We end the sequence actually not far above where we started in 1952, but this time against the background of a greatly changed economy and society. To understand this we need to widen the lens to include the panorama of Total Credit Market Debt Outstanding:


    This doesn't fit conveniently into the narrative. All those whirring government-debt-counting widgets on blogs, yet 2007 was an historic low point? Something's funny here; time to look at what else was going on in the credit market. Let's begin with the "domestic" elements:



    Proportionally, households up from 19% to 25%, nonfarm up from 3% to 7%, others generally stable or declining. The domestic sector as a whole shrank from 95% of TCMD to 69%.

    So what was responsible for most of the rest? The financial sector:

    Four subsets account for most of the financial sector:


    As you see, it's now mostly mortgage-related. The graph above takes us to 2008, and below you see the first decade of the new Millennium, including the bailout of mortgage pools:


    This demonstrates the government's recent effort to maintain the status quo. Personally, I feel that criticising them for this is like stoning the firefighters when they come to the blaze. My gripe is about how the fire started, which was the attempt to support homebuying and then to shore up home prices.

    Take a look at what happens when we include the above three mortgage-based elements in the category of household debt - I rename the aggregate as "house and home":


    So it's not general government overspending that's the biggest problem; at least, not directly. And then, when the home lending cracks up, the government rides to the rescue:


    Oddly, from 1974 on, home and government debt are almost mirror images:


    But it wasn't so before, when the two lines ran almost parallel. Perhaps there was some postwar golden age when money was going not into the spendthrift government, not into illiquid and non-income producing homes, but instead boosting American business? It seems so, if we look at the other subsectors of the "domestic" heading:


    Having partially re-categorised the debt in a way that I hope you won't think too unfair, here's the simplified big picture showing how things changed over those 58 years:



    To me, this seems illustrative of developing malinvestment. We have been buying and even speculating on houses, and filling them with foreign-made TVs, computers, iphones etc; but we've had much of our consumption on credit and indirectly (via the Treasury), quite a bit of that from abroad. (I say "we" because my brother is now an American, and aso because Britain is America's mini-me in terms of its economic problems.)

    Imagine if that money had gone into business ventures, instead of illiquid and non-income-producing housing assets. What if successive governments had reined-in credit and consumer spending, and encouraged the reinvestment of profits into industry and research, rather than the unreally-rewarded financial sector?

    Far from over-regulating, it would seem that government has failed to regulate sufficiently. Laissez-faire economics may work okay when the quantity of money is limited, but fiat currency (and debt, which forms part of it) entails the duty to supervise and intervene when necessary.

    Was debt ever good? I speculated earlier that there might have been a postwar golden age of beneficial credit, when business borrowing accounted for a third of all debt. Yet when we relate the credit market with GDP, here's the result:



    It seems as though debt never fully pays for itself, and the faster the debt accumulates, the worse it gets. Coincidentally, Karl Denninger has just made the same point. Last year, Nathan Martin's "Chart of the century" purported to show that beyond a certain point, additional debt results not just in lesser growth, but actually reduces GDP. Are we all wrong, or is "sound money" a (maybe the) precondition of a sustainable economy? (And how do we square this with the fact that many individual businesses borrow and prosper - is it that leverage gets you market share but tends to shrinks the market overall?)

    The size of the debt is unimaginable, though still calculable. Four years ago I was reading Michael Panzner reporting on comptroller-general David M. Walker's mission to warn the nation, Cassandra-like, of the scale of unfunded State healthcare obligations. Even then, the latter was talking about figures exceeding $50 trillion. Well, we've breached that ceiling right now, even without factoring-in the notional capitalized value of benefit programs. Here we are:



    Some say we're approaching (and some others say we're past) the point where it becomes mathematically impossible for the economy even to service the interest on our obligations, let alone reduce the amount outstanding. I'm not sure I agree, though the challenge is certainly daunting. Here is the total credit market debt expressed as a percentage of GDP:



    If we have to be deeply in hock, it's better to have the government take care of some of the burden, for three reasons:

    1. The debt doesn't have to end, as for example a mortgage does. Loans may need to be rolled-over, but the nation as a whole doesn't retire, so it can borrow forever.

    2. Government debt is more secure, in the sense that more fiat money can be created to make the payments. How can you run out of nothing, which is where the money comes from? (Or rather, it comes from diluting the value of other people's stock of the money.)

    3. The interest rates are, accordingly, lower than for most private and corporate borrowing. The average for all Treasury interest-bearing debt is currently 3%, whereas fixed-rate mortgages (if you can get one) are running at 4% - 5%, and credit cards are now averaging over 16%.

    So, by all means let the government play little Dutch boy, plugging the holes in the dam. The total interest on the national debt for fiscal year 2010 was $414 billion, a vast sum but still an effective interest rate of around 3%. What average rate is being paid on the other $38 trillion or so that's burdening the economy (not to mention capital repayments)? Imagine if that debt was on terms similar to the government's...

    Maybe it's not the banks that should be bailed out, but businesses and consumers. How would things look if more debt was transferred to government and slowly retired and paid for by various forms of taxation? Could this help distressed consumers and businesses keep going for long enough to get back on their own feet? Or must we go the let-'em-fail way demanded by free-market Puritans? (In which case, can we also get puritanical about the money supply and who is allowed to supply it, please?)

    Bailing out is a good thing to do when the ship is sinking, but we have to do much more than that. So much has to go right that it's no wonder Dr Marc Faber (aka "Doctor Doom"), away in his Thai retreat, reckons it's hopeless and predicts a complete economic "re-set" (including the death of the dollar) and war. I hope he's wrong for once, otherwise I'm wasting my time here.

    Survival begins in the head: you have to believe you'll get through, so you can condition your mind to look for tools and opportunities.  Can we work on the assumption that there is a way?

    One way was adumbrated in 1993 by the far-seeing billionaire Sir James Goldsmith, who recognised the threat that GATT posed to Western economic and social stability. Sadly, the man is no longer with us, but his book, "The Trap", is still available and highly relevant, even more so now that Goldsmith's predictions are coming true.

    Globalisation has tipped the balance of power so decisively in favour of capital and against labour that American - and European - society is beginning to tear itself apart. Sir James advocated a system of economic trading areas to protect against completely unbeatable competition from extremely low-cost labour forces.

    Either capitalism - which, theoretically, creates work and wealth by allocating capital efficiently - must have some bounds set for it so that it nurtures the society that gave rise to it - or, as Marx predicted, its contradictions will destroy itself. If we don't want an Ayn Rand dystopia, we have to make it possible for our people to work and prosper.

    We are presently trading away not merely our income but the jobs that earn it, and the capital and physical means that create the jobs, and the knowhow that utilises the means in productive projects, and the intellectual property rights that safeguard the knowhow. As for the development of fresh, potentially wealth-creating knowledge, I understand that businesses have been cutting their R&D and even the universities favour their MBA schools over maths and science.

    We need a plan. It will call for visionary leadership, skilled and patient management, the most careful international diplomacy, and the co-operation of politicians, voters, workers, industrialists and financiers.

    In the meantime, emergency measures may be necessary, and they may not be the ones the econo-fundamentalists want. Austerity could be the worst possible solution at this stage - it is the exact opposite of Keynesianism to let rip when times are good and starve the economy  further when there's already a recession on, and others are making this point already, e.g. "Rortybomb" and Australian economist Bill Mitchell. And there are those who say that taxation is nothing like ruinously high, yet.

    Or do you go with "Doctor Doom"? If so, maybe you shouldn't be planning to be rich in your own country, but preparing to move far away from the consequences of the coming collapse.

    If you think that is irresponsible doom-talk, consider the President's Executive Order of a couple of weeks ago. I don't read the establishment of a White House Rural Council as more socialist interfering; I sense the beginning of a national plan to survive severe disruptions in the global food supply chain. If it isn't, then there should be one.

    For it's about more than just money, now.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jun 20 4:48 AM | Link | Comment!
  • Barnes & Noble: I told you so - now it's up 33%
    My 20 Dec article said B&N could fight back. And now Borders is busted, B&N have a great chance to restructure.

    We greatly appreciate our Kindle (can't get Nook Color here in the UK - yet), but my wife says she still likes the heft of a physical book, and seeing how much you've read. I know that may sound simple, but how many men prefer a wet shave because they like to see the bits-and-soap in the sink? A lot, according my friend in a major advertising and marketing firm.

    Apply that kind of psychology to the way you run a store, plus the advantage of having 600+ college outlets. B&N could continue to please.

    Meanwhile, the stock is up 33% in the less than two months since my first post on the subject. Anybody take note?


    Before you ask, no, I'm not in - we're holding cash in preparation for a house move. But I enjoy gainsaying the experts!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: BGPIQ, BKS
    Feb 16 1:22 PM | Link | Comment!
  • Jefferson, debt and democracy
    "Economy and liberty, or profusion and servitude"...

    Now that we are once again in "times that try men's souls" (as Tom Paine put it) many are harking back to the wisdom of Thomas Jefferson and longing for a return to the principles of the United States Constitution. This makes it all the more important to establish exactly what Jefferson said.

    Let's take a frequently-quoted passage: “To preserve our independence, we must not let our rulers load us with perpetual debt. We must take our choice between economy and liberty, or profusion and servitude. If we run into such debts, we must be taxed in our meat and drink, in our necessities and in our comforts, in our labors and in our amusements. If we can prevent the government from wasting the labor of the people under the pretense of caring for them, they will be happy.”

    This is a hashed-up version of the longer and more elegant original; and even takes liberties with the language (for example, it wasn't "take our choice" but "make our election"). As so often with Jefferson quotations, there is no indication of when he said it, and to whom; and when there is, it may be wrong - this alternative mash-up says it's from "A Summary View Of The Rights Of British America" - it's not (see the 1774 text of the latter here, or here).

    No: it wasn't written before the Revolution, but 40 years afterwards, with the weight of experience added to his undimmed passion for liberty, and as a result it's far more interesting.

    Writing from retirement in his Monticello home, the 73-year-old is responding to historian and fellow-Virginian Samuel Kercheval, who has written a pamphlet calling for a convention to reform that State's Constitution and is seeking the support of the former 1770s representative to the Continental Congress , who in addition to later serving as President and Vice-President of the Republic has also been Governor of Virginia.

    Kercheval strikes gold for posterity, if not for his immediate cause. Jefferson takes the opportunity to get down to first principles, including the "mother principle" of republicanism, which is that "governments are republican only in proportion as they embody the will of their people, and execute it." More than even before the Revolution, he is convinced of the need for "equal representation" in the Senate and House of Representatives, and observes that the machinery of democracy fails these yardsticks in both bodies. He also worries about the near-immunity of the Governor and the supreme justices, and the poor quality of juries chosen not by the people but by legal functionaries. He concludes the first part of his letter by saying that the system has worked well so far not because of the Constitution, but in spite of it, thanks to the fact that "our functionaries" have been "generally honest men"; and then proposes ways to subdivide powers and responsibilities so as to maximise the involvement of "every man who fights or pays."

    Setting aside our modern views on slavery, suffrage for women and property qualifications for voting, it's an interesting precondition that the republican should be ready to pay his full share of the price of decisions which he has (or should have) an equal part in making. The people in whom he reposes his ultimate trust, are those who put their property and lives at stake for their liberty. Perhaps Jefferson sees us more clearly through his green spectacles than we see him.

    But there is no equality between debtor and creditor, and Jefferson keenly perceives that the money system has the power to destroy freedom. We shall go from debt, to taxation, to oppression. After the bully-boy performance of Treasury Secretary Mr Henry Paulson in October 2008, expressing his "disappointment" with Congress' decision to reflect the will of the people and refuse assistance for several distressed banks, one of which had recently had him as its CEO, do we catch a flash from those Monticello lenses?

    Now, at last, to the passage (paragraphing and emphases mine) in which the old revolutionary warns how the Republic can be lost:

    "I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom.

    "And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.

    "If we run into such debts, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes; have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers. Our landholders, too, like theirs, retaining indeed the title and stewardship of estates called theirs, but held really in trust for the treasury, must wander, like theirs, in foreign countries, and be contented with penury, obscurity, exile, and the glory of the nation.

    "This example reads to us the salutary lesson, that private fortunes are destroyed by public as well as by private extravagance. And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for a second; that second for a third; and so on, till the bulk of the society is reduced to be mere automatons of misery, and to have no sensibilities left but for sinning and suffering. Then begins, indeed, the bellum omnium in omnia, which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression."

    Now some will draw the conclusion that we have been brought to this pass, or close to it, by a system of public benefits; but it's more than that. Powerful private interests have weighed down the people individually with the burden of "private extravagance" and then offloaded their own heavy share of the costs of mismanagement onto the people collectively, while retaining for themselves personally the enormous fortunes they made open-eyed in their corrupt and destructive scheme.

    This, over the same 30-odd years that saw the hollowing-out of the nation's economy by exposing it through international trade to competition for which the country was not adequately prepared, any more than the fish of the Atlantic were ready for the incursion of Pacific species to which the opening of the Panama Canal exposed them.

    Had the people been informed by a knowledgeable and responsible news media; had they understood and been helped to accept the adjustments that would be demanded of them; had they been represented by delegates who knew their duty to their constituents; had their diplomatic and trade representatives managed the pace and scale of the economic transition; then they could have achieved economy and preserved their liberty, while allowing the less fortunate of the world to rise from unjust poverty. Instead, the aftermath of a profusion which continues to enrich a financial, politically-protected elite has, we must fear, condemned the people to servitude, or at least such inevitable obligations as will shackle their descendants for a generation or more, the attempt to escape which must involve tension and possibly worse between the nations.

    Did Jefferson see this 195 years ago? It could have been yesterday.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 09 1:26 PM | Link | Comment!
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