Baby Boomers Gift to Their Children - Bleak Economic Future?

Economic meltdowns are difficult to predict as they seldom follow the path of previous meltdowns.  But the policies the US has pursued the last 30+ years has created conditions that suggest an economic meltdown, triggered by Corporate debt, that will have crippling long term consequences may be hard to avoid.

It will start with the stock market.  Historically you paid an average of $16 for each $1 of corporate earnings when you buy stock (called the price earnings ratio, or P/E ratio).  For much of the last 100 years analysts developed a P/E ratio by averaging up to 10 years of earnings to avoid relying too heavily on unusual events.  Today financial analysts look only at the earnings from the prior year.  Looking at just the prior year the average P/E ratio for stocks currently is about $24 - you pay $24 for each $1 worth of earnings the corporation generates.  This is 1/3 higher than historical average so only makes sense if earnings continue to grow relatively rapidly. 

If you use the old measure of P/E ratio by looking back at average profits of stocks over the last decade you get a P/E ratio somewhere between $30 and $40 to a $1 of earnings.  By this measure current stock prices are probably 50 to 75% overpriced.  That will be a long fall if the market starts sinking.  

The peculiar characteristics of our current economy suggest that long fall is not unlikely.  For the last decade corporations have loaded up on debt.  Corporate debt has gone from $49 trillion a decade ago to $89 trillion today.  Currently the vast majority of corporations have only about $12 of available cash to pay back every $100 of debt.  It's not just the US. Global debt is nearing $250 trillion, over 300% higher than global GDP.

How did this explosion in corporate debt happen?  Historically low interest rates put in place to keep the Great Recession from becoming a Great Depression allowed corporations to pump up earnings with debt for a decade.  They borrowed money and used the money to do things that otherwise would have had to be paid out of earnings, and thereby boosted earnings reported to shareholders.  Works great as long as you can keep rolling over the debt and just pay cheap interest.  On top of that last year corporate tax cuts gave corporations another short term boost unrelated to operating profitability.  For a decade stock prices have been on the equivalent of a sugar high.

Now interest rates are going up.  The lid is going on the sugar jar.  As Corporations refinance debt at higher rates it will undermine the supports propping up stock prices.  Some Corporations will not be able to pay or refinance their debts, those that do will not be able to generate the profits investors expect as they pay higher interest or try to pay off the debt.   So the stock market will sink (as it has already started to do).

A sinking stock market isn't necessarily a huge problem for the rest of the economy, but this one may be.  Remember in the Great Recession all the hand wringing about both public and private pension funds being underfunded?  As the debt fueled bull market took off in the last decade all that hand wringing went away as the higher stock prices made the pension funds balance sheets look a lot better so everybody ignored the basic underfunding.   But as stock prices sink more and more pension funds will face obligations that exceed their assets.

10 years ago it was a potential future problem.  But now with a big chunk of the population moving into retirement and starting to draw on their pensions it is no longer a future funding problem.  Either less money is going to be available for paying pensions, or taxpayers are going to have to put up a lot of money to cover the shortfalls.   Neither course of action will produce a good result.

If a lot of pensioners find they have less money in retirement than they thought they would, they will spend less dragging the economy down.

A Government bailout is equally bad.  Decades ago Congress created a Pension Benefit insurance fund to step in to rescue workers whose pension fund went bankrupt.  But a decade ago the hand-wringers had realized that it was clear the Pension Benefit Fund would not be capable of dealing with all of underfunded Pensions.  The 10 year debt funded stock market rise made pension fund balance sheets less scary, so we allowed the problem to stagnate instead of dealing with it. 

With the National debt over 100% of GDP the government is not in a position to step in to bail out the pension funds without massive problems with the US credit rating.  We could be heading down a path similar to the path Japan has been bogged down in since 1990, an economic wilderness of enormous government debt, deflation and stagnant growth.  Nearly 30 years later they are still struggling to restore fiscal sanity.

So the conundrum - either you raise taxes on consumers to cover pension fund shortfalls and thereby further undermine the consumer spending that underpins the economy, or government borrows more money, undermining our credit rating and making paying off our National debt almost impossible.  Without even considering President Trump's ill-advised trade wars, the future we leave for our children has more pitfalls than promise.   

While it is easy to be a pessimist and see all the things that could go wrong, and hard to predict the good things that could keep us on an even keel, the nature of our current problems makes a path to safety difficult to imagine.

How the Second Amendment Could Read

Gun possession is a uniquely local concern.  I have a legitimate interest in whether angry, careless or mentally unstable people in the geographic area where my family and I spend my life have access to firearms and ammunition.  Or whether my neighbor keeps a loaded handgun in his bedside table that could be accessible to a thief or a curious child.

On the other hand as a resident of the San Francisco bay area I have very little stake in whether people in Colorado walk around with a handgun strapped to their belt, or possess assault rifles.  Or if people in Wyoming drive around with loaded rifles in a rack in their pick up.

That the second amendment is obscure in its meaning has been clear since the founding fathers drafted it.   But the most fundamental problem with the second amendment isn't ambiguity.  It is that it converts a distinctly local concern into a Federal issue.

The Second Amendment of the United States Constitution reads: "A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed."

Maybe that made sense as a Federal issue when we were 13 small colonies on the eastern seaboard with much of the country, and the State Militias, still engaged in periodic conflict with the native populations on the northern, western and southern borders of the country.  

It does not make sense today.

A revised second amendment should strike the first two clauses - "A well regulated Militia, being necessary to the security of a free State..."  State Militias in the sense they existed when our Constitution was written, citizens keeping weapons in their home so they could respond to danger to the community, no longer exist.  Every state has a National Guard who supplies weapons members need.  We also have a multitude of law enforcement agencies, many with SWAT teams.   

The first clause should be replaced by language stating  "Control of deadly weapons being a uniquely local concern...."   With that preface the rest of the second amendment would work just fine if you add four words at the end - "...by the Federal Government."  

Maybe to avoid overly clever twisted legal logic making an end run around a State's choices in controlling deadly weapons you might have to add an exception providing that the right of the States to control deadly weapons supersedes the commerce clause.

This should be an eminently politically feasible amendment.  Instead of a Red State / Blue State battle to impose nationwide rules, each state could insure they have the right to determine the status of firearms in their state, or could let each county or city within the state decide for themselves how they wanted to treat deadly weapons.  

The resolution of our national disagreement over the second amendment should not be driven by all or nothing partisans on the two opposing sides.  The sensible middle should take the lead. 

The Fantasy that Arming Civilians Will Save Lives

We've all heard the slogans.  The only way to stop a bad guy with a gun is a good guy with a gun.  Guns don't kill people, people kill people.  

Wayne Lapierre, the CEO and Executive Vice President of the NRA is the most prominent advocate for these views.  Mr. Lapierre - like our President - avoided service in Viet-nam and was never in the military.  Perhaps that is why he has such an airy fairy view of arming civilians.  The real world demonstrates that the more people have guns, the more people get shot. 

Despite the enormous amounts of time and money spent training our military to handle firearms safely, accidental shootings happen regularly.  In Iraq between 2003 and 2011 ninety (90) soldiers were killed by accidental firearm discharges not involving combat.  

That figure doesn't include the much larger battlefield casualties from "friendly fire" - inadvertently shooting fellow soldiers in the heat of the moment.  The Wikipedia annotation on Friendly Fire states:  

"According to the most comprehensive survey of casualties (both fatal and nonfatal), 21 percent of the casualties in World War II were attributable to friendly fire, 39 percent of the casualties in Vietnam, and 52 percent of the casualties in the first Gulf War. In the ongoing conflicts in Iraq and Afghanistan, casualty rates are 41 percent and 13 percent, respectively.  (These figures includes firearm, artillery and bombing casualties so firearm injuries would be some subset of these numbers)

Add to these figures the millions of inadvertent civilian casualties in wars and the true scope of the danger of firearms becomes apparent - any time the bullets start flying lots of people besides the bad guys are at risk, maybe more at risk than the bad guys. 

Remember when a shooter shot a bunch of soldiers at Fort Hood?  Some argued this demonstrated the fallacy of the notion lots of guns will stop shooters.  But they assumed military bases are full of people walking around with loaded guns.  Soldiers outside a combat zone may have a weapon, but they will not have ammunition.  There are probably more people walking the streets with loaded guns in any town in this country than are walking around packing heat on Military bases.   It is illegal and seriously punishable offense to carry a loaded firearm on most military bases unless you are law enforcement or have some special permission based on your duties.    The military learned long ago more loaded guns equals more shootings, even among a population trained in proper firearm safety. 

On the civilian side a couple times a year some highly trained police officer is a victim in an accidental death involving firearms in the hands of the police, not to mention the regular litany of people killed by police misreading a situation as more dangerous than it in fact is - mistaking a phone for a gun, or seeing non-existent guns.

Both the military and law enforcement go through weeks of rigorous training to learn how to use firearms and are generally required to refresh their skills every year.  Are armed civilians going to be required to do the same? 

The irony in all this is 100 years ago or so as a country we were moving away from our frontier habits where everyone packed guns because our forefathers had learned more guns in the civilian population means more violence.   History demonstrates that arming civilians will mean more shootings, not less.  It will lead to a net increase in shooting injuries and deaths.  

How a Good President would Respond to Putin's Nuc Boasting

Mr. Putin has been bragging about all his new Nuclear technology that will allow Russia to avoid our missile defenses.  This is evidently about firing up national pride so he can get an overwhelming electoral victory next week (victory is assured as he has already arrested or eliminated all the opposition).

I know how every previous President in my lifetime would have responded.  They would have made a public statement to the effect Mr. Putin is taking Russia down the same road to failure the Soviet Union followed.  The Soviet Union did not collapse because it was militarily weak.  It collapsed because it stifled its people's creativity.  It did not allow its people the freedom to build a life on their own terms. 

No need to say that Putin is doing the same to his people.  They know it.

But I am not sure President Trump recognizes this is what is happening.  It often seems like President Trump has the instincts of an Oligarch.  The idea that a country's strength comes from the personal and economic freedom of it's people seems outside his life experience.

I suspect he will bluster back about how powerful our military is.  I hope for better.  We shall see.

Invisible Hand? Or Government Intervention?

Most Economists are true believers in Adam Smith's notion that economy's are best run by the "invisible hand" of the market.  In Economic theory as the unemployment rate drops, wages should rise as workers become more in demand.  That hasn't happened since the Great Recession.  Even as unemployment has dropped steadily to near historic lows, workers wages have stayed stagnent.

Believers in the infallability of the invisible hand, noting that wages have ticked up slightly in the last few months, started arguing this is the invisible hand reflecting the fact the economy is starting to pick up.

I wonder.  For the last couple years local and state governments, in the absence of federal action, have been enacting gradual scheduled increases in the minimum wage within their jurisdictions.  The jurisdictions enacting gradual minimum wage increases include many of the largest and most dynamic areas of the country.  Does the economic data the Economist's are relying on showing an uptick in wages control for increases resulting from government mandated increases in the minimum wage?

It makes me also wonder if the high productivity and low income inequality from the mid-1950's through the early 1980's reflect the "invisible hand"?  Or did it reflect Democratic control of Congress for 24 straight years with fairly regular increases in the minimum wage and strong support for Labor Unions?  Once the Reagan Republican revolution, hostile to Labor Unions, wrested control of Congress from the Democrats wage growth slowed and inequality began rising - which it has done ever since.

Not to suggest Labor Unions are a great thing.  They tend to evolve into organizations that are antithetical to efficiency and productivity.  But Labor Unions are really just an extension of the "invisible hand".  They evolved from individual members of the economy banding together to stop management from exploiting their lack of power as individuals.  For the first decades of the labor movement, government action tended to protect management.  Even in the heyday of Labor Unions government was acting more as a referee than a planner - government never attempted to find a way to balance the power of management and labor that aligned both interests rather than making them opposing forces.

At it's core modern economic theory, including the "invisible hand", is simply survival of the fittest carried over into economic transactions.  Our evolving civilization has the demonstrated the ability to use our creativity and growing knowledge to modify "survival of the fittest" - recognizing that even in matters of self-interest cooperation is usually better than confrontation.  Economic's needs to catch up.