THE GOVERNMENT HAS NO MONEY

THE GOVERNMENT HAS NO MONEY

(Jeff was unavailable this week, so we wanted to post one of the top-rated Posts from April 2018 which seems so relevant with our current Presidential campaigns.  Enjoy!)

     Recent generations of Americans have been raised and educated to view the Government as an omnipotent and never-ending caretaker, as if it is "the Alpha and Omega, the beginning and the end." We personify this caretaker with fatherly characteristics and responsibilities. We state, "They should pay for the poor...They should tax the rich...They should increase Social Security...They should pay for my childcare..." Why do we believe that because we were born, that some entity behind the green curtain should pay for our comfort, much less our survival? Is this belief inherent, or is it instilled?
     Remember that we must localize all monetary transactions in order to begin to understand how things actually work. In this situation, what we do not realize is that there is no "They." There is only you, me, and our neighbors. If I want someone to pay for my childcare, I should walk over to Mrs. Johnson's apartment once she gets home from work at the bottling plant and let her know that I need her to write me a check. Now, I will need to be prepared for the fact that she might belt out a little Michael Jackson, "If you can't feed the baby then don't have the baby," and moonwalk herself back into her apartment. But, at least I would feel like I had shown good character and asked her directly for her money.
     Governments are pass-through entities just like the Limited Liability Company (LLC) which you set up for your amazing Rodan & Fields skin care side business. "They" only have the money that you agree to give them (and yes, you have to agree - Another Post). "They" produce nothing, create nothing, and cannot survive without you - not the other way around.
     Now follow me on some of these numbers. A tip - read the numbers slowly and attempt to digest what they really mean. Human nature forces our eyes to glaze over when reading big numbers, and this is exactly what "They" are counting on. The U.S. federal budget this year is approximately $4.5 Trillion. This is the amount of your money which "They" are going to spend. But, it gets worse. You are only agreeing to give them $3.5 Trillion, so "They" are going to borrow another $1 Trillion from the Chinese, the Japanese, and the Germans so "They" can pay for all of the things we believe that "They" need to give us. Now since Mrs. Johnson gave you the moonwalk instead of a check, and since you still feel that someone else should pay for your childcare, "They" knocked on her door for you and took her money under threat of a long list of punishments, to include federal prison. For the rest of the money that Mrs. Johnson couldn't come up with, "They" went hat-in-hand to foreign countries and bartered away more of Mrs. Johnson's, and your, future in order to get the rest of the money.
     Now stay with me. since World War II, taxes have grown 15% per year faster than Mrs. Johnson's paycheck from the bottling company, and the federal government's spending has grown a shocking 50% faster than her paycheck. So each year, the IRS Agent knocking on her door takes a larger slice of her pay. But, "They" still don't have enough, so they travel the globe and beg other countries for more and more every year.
     Some big numbers again. Because of this trend, the National Debt (our Collective Mortgage) is about $20 Trillion, which equates to $50,000 for every man, woman, and child (so get Junior to work!). But, this does not count Social Security and Medicare, which also have no money. It will cost you and me another $80 Trillion to make up the shortfall we have not saved for the Baby Boomers. This is on top of the Social Security and Medicare taxes we will already be paying out of our paychecks for the indefinite future. This fiasco is called an "unfunded liability."
     Very important. When "They" tell you that Social Security will "run out of money" in 2032 (or whatever year they keep changing it to), what that really means is that will be the first of many years in which annual worker payments into the system will not be sufficient to make the payments out to the recipients of the system. There is no money sitting in a Social Security bank account holding all of the contributions you gave them out of your paycheck for all those years. The extra "savings" were raided by politicians years ago. There is no money.
     So because we thought it would be rude and even outrageous to personally ask Mrs. Johnson for her money, and we instead got "Them" to do it by force, we all now collectively owe $100 Trillion, not to include the money we are already obligated to pay each year into the future. I don't even know how many zeroes are in $100 Trillion. Fourteen?
     In another Post we will address different options for possibly saving this amazing country from bankruptcy, or at least a painful devaluation, like so many other countries have had to do throughout history. But until then, we need to understand that all economics are local. If you want to ask your neighbor to cover some of your expenses, then do it. If you want to pay someone else's bills, that would be a wonderful gesture. Just understand that there is not a middleman who is paying for what we feel we deserve. Not only that, but that guy has even already blown all the cash we gave him to hold for us!

"The perfect political party would promote as small a government as possible along with pure capitalism, while not promoting their personal beliefs on me."
   -   Jeff Martinovich , "Just One More: The Wisdom of Bob Vukovich," Ash Press, Spring 2020

* For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.

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ECONOMIC FUNDAMENTALS IN TROUBLE!
     As kids we were taught that if we didn't get the fundamentals correct, we would fail when it came time to perform.  If we spent the summer at the pool instead of practicing left-handed layups, or fielding grounders at the hot corner, that kid across town would eat our lunch come time for the District Championships.  John Wooden, Pete Rose, and Carli Lloyd have taught us that without strong fundamentals, when the pressure is on, we will eventually fail.
     Today our focus on identify politics, socialism, and how many Instagram followers we can build has caused us to take our eye off the economic fundamentals.  Remember JAM VIEWS members, when the money doesn't work nothing else matters.  The scary part today is that momentum, kinetic energy, just seems to keep this reality TV show going until one day it doesn't.  Let's take a current inventory of broken fundamentals:

1.  Negative interest rates in Europe are such a "no big deal" now that the European Central Bank is moving to cut interest rates even further and to reinitiate quantitative easing (flooding more money into the system).  As a reminder, 40% of global bonds yield less than 1% and over $13 trillion (yes, trillion) of bonds have negative interest rates (you pay them to hold your money!).  I frequently get the question, "Why would anyone do that?"  The paradoxical answer is that U.S. and global pensions, insurers, and financial institutions have so much money (especially with the extra $12 trillion printed out of thin air by the U.S. in 2008) that they have to put it somewhere.  Their legal, regulatory, and liquidity constraints, along with their own Investment Policy Statements, mandate that a significant percentage of their portfolio be allocated in government and corporate AA and AAA-rated securities.  Therefore, it is mandated that they make irrational investment decisions because of previous irrational decisions against the fundamentals - technocrats and corporate lemmings all going with the flow, rationalizing to a farmer in Iowa that this is how it has to be.

2.  The U.S. Federal Reserve just lowered interest rates in fear of the U.S. economy beginning to stall, trade war impacts, and the dollar strengthening against other currencies "because they are lowering rates also."  Whatever happened to the U.S. Federal Reserve's self-imposed mandate to focus on stable currency and 2% inflation (as wrong as that may be)?  Why did the Federal Reserve raise interest rates last December when the stock market was tanking, credit markets were seizing up, and inflation expectations were falling, only to now lower rates this week while equities are at record new highs and wages in June grew at 5.5% year over year according to the Bureau of Economic Analysis (BEA)?  Remember another JAM VIEWS message - the government technocrats have no idea what they are doing and never have.  This is why, in relation to currency, we should follow the advice of Steve Forbes and likely new Fed board nominee, Judy Shelton, and return to a gold standard - or some fixed standard - to take control out of the hands of ivy-league elitists who have mucked it up for decades.

3.  Speaking of the gold standard, always discard Washington's rationales for leaving the standard, and know that it simply was about printing more money.  If we had fixed weights and measures, we could not print more money and just pray that the rest of the world keeps following the full faith and credit of the U.S. dollar.  The current Administration has done a Herculean job of implementing fiscal changes back in the direction of Adam Smith and free markets.  Not only are wages up significantly for the 99%, but the personal savings rate was also revised upward to 8.1%, meaning that we all are not over-leveraging ourselves as in other bubble economies.  Employee compensation has increased 42% more during the last two years than in 2015 and 2016 (those are huge numbers for real people).  EMPLOYEE compensation grew by nearly $1 trillion between 2016 and 2018.  Wow.
     Yet, remember in your business fundamentals course on income and liabilities when they explained that all of the income growth in the world won't help if you are spending even more?  Remember when your parents fought all night about the checkbook and claimed they could never get ahead even with three jobs unless they cut the spending?  With all "thy getting" we are now getting, we are still spending even more.  Why can't we make politicians stop spending our money?  Why do we allow them to just print more debt out of thin air to fund their "compromises?"  Are we that distracted and apathetic to try to understand, to try and stop them?  Because of the tax cuts and regulation cuts, Federal tax revenue is up (don't let the misinformed tell you otherwise), yet spending is also way up.  Who will cut entitlements?  The rest is down in the noise.  Understand the fundamentals.

4.  Finally, there are so many signs that, unless we get back to economic fundamentals, that kid across town is about ready to embarrass us in the District Championships.  This year, gold has risen 10% against the U.S. dollar, and alternative currencies like bitcoin are up 160% against the dollar.  Are the increases in these alternative stores of wealth signaling a crisis in confidence in fiat currencies (paper money)?  When will the punch bowl be taken away?
     When it happens, as it always has and always will, let's hope everyone has studied the last seventy JAM VIEWS posts and are prepared for the next Black Swan.  With tens of trillions of more dollars in the system (M1, M2 & that stuff) ready to ignite at the first hint of inflation, as well as over a quadrillion dollars (yes, quadrillion) of derivatives now trading in the financial markets (both tremendously more than in 2008), the "impact" from a hiccup will make 2008 look like a rounding error.  And, wait until we add in free college for everyone, free medical for everyone in the Western Hemisphere, and turn all corporations into government agencies.  Check please!

     May we stay diligent this week, seek education and understanding, and find our own truths.  Have a great week!

"Give me a lever long enough, and I'll move the world."  -  Archimedes

** Thank you very much to the WSJ, Forbes and Fortune for the above quotations and statistics.

** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.

** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com 

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WINTER IS COMING

     Too much debt eventually gets us all: personally, corporately, and nationally.  I have made this mistake many, many times.  For example, in 2010, amidst the regulator backlash following the Financial Crisis, I spent our cash and debt on acquiring financial practices from Merrill Lynch, UBS, and Morgan Stanley.  Taking advantage of the market dislocation, I was able to provide our MICG shareholders a $4 increase in equity value for every $1 spent on acquisitions.
     But, I didn't keep enough "powder dry" for our own Black Swan, which by definition I never saw coming.  If I had saved $10 million in the war chest, I could have written a large "settlement" check to the government regulators and had them move onto the next target.  Instead, I demanded arbitration to defend our people, and a terrible spiral, cyclone, ensued.  I should have saved the money.
     The United States is finally bumping up against the wall of too much debt, and extreme consequences are on the way unless radical changes to entitlement spending are enacted quickly (which isn't going to happen in this environment where everyone has lost their minds).  So, let's first clarify for our JAM Views members the difference between debt and deficit.  The talking heads interchange these terms all day long, and this confuses most observers and obfuscates the dire station we are in.
     The DEFICIT is the yearly amount we are dipping into our credit line (we have no savings) to pay our current bills.  This is your Wells Fargo overdraft for small items, or credit line secured by the house for the big items (the country's credit line is secured by your future life wages and the anticipated taxes on those wages = "the full faith and credit of the United States").  The last balanced budget was under Bill Clinton, so we have been dipping into the line ever since, up to the tune of $900 billion just this year!
     The NATIONAL DEBT is the total mortgage, to which the annual deficits keep increasing the balance, or which is also increased in large chunks by the Federal Reserve printing more money to fund the Iraq Wars, or when the Obama Administration bailed out the banks with trillions of newly printed dollars. (All of this printing eventually, always, creates significant inflation, but we will cover that another day).  The U.S. now owes $22 Trillion in Treasury debt (the country's mortgage), with the majority of principal due to bondholders over the next 8 years, and with $6.5 trillion owned by China, Japan, and Saudi Arabia.  Also, don't forget that the true national debt is over $70 trillion once we include our unfunded liabilities (the commitments we have made without saving the money to cover).
     Now, debt is only a problem in relation to revenue; with our household, our company or our country.  Unfortunately, our national debt has ballooned to 80% of GDP (revenue) and in the next few years will equal 100%.  Very, very soon, with this tenuous balance sheet, America's creditors (buyers of U.S. Government bonds - home and abroad) are going to demand much higher interest rates due to risk of default, "cram down" or other political options. (Don't believe it will never happen, as we have done it multiple times before, and President Trump has mentioned these options more than once).
     The Perfect Storm current possibility, or probability, comes from the fact that after the 2008 Financial Crisis, the Obama Administration decided to use monetary stimulus (lower interest rates and printing money) instead of fiscal stimulus (lower taxes and reduced regulations).  Therefore, instead of reducing the mortgage-bank debt, we greatly increased and redistributed the debt to the U.S. Treasury, corporations, and personal consumers.  We piled on more and more debt to solve a debt crisis; and the world followed us.
     Over the past 10 years, total global debt (sovereign, corporate, household) has risen 75%.  Countries owe $60 trillion, and corporations owe $66 trillion, with McKinsey reporting that 40% of U.S. companies are rated only one notch above "junk bond" rating or lower!  Pause for effect.  The Bank for International Settlements estimates that 10% of long-term companies in the developed world are now "Zombie Companies," meaning earnings before interest and taxes don't even cover the interest expenses.  They are just sucking in more capital to survive. (Lyft IPO?).
     Why do you think everyone in Washington calls for a public execution of the Federal Reserve Chairman whenever he now mentions raising interest rates?  A 1% increase in rates will be disastrous on this huge debt load.  These higher interest payments will crowd out business investments and the nation's growth rate will stall; which in turn will mean less tax revenue, lower household incomes and a higher debt to GDP ratio, and the cycle, or cyclone, will feed upon itself.
     The only two answers, again, are to increase growth (pro business) and to actually reduce entitlement spending (Medicare, Medicaid, & Social Security).  Don't follow the talking head's misdirection about defense and discretionary spending.  Those numbers are down in the noise and at historical lows.  At current defense budgets of only 3.1%, we have already given up the world to the Chinese.
     So, which politician on TV lately has the guts, or the brains, to raise the social security full benefits age to 70, and then index it to increasing life expectancies?  Stopping the growth of entitlements is the only answer, only answer; even strong growth cannot eclipse this tidal wave.  As educated JAM Views members, we would be extremely naive to believe a politician could pull this off in today's environment, so the prudent decision would be to plan for the more likely scenario.
     Remember, in investing, always do opposite what feels good at the time, and always do opposite what everyone else at the cocktail party is doing.

"The race to zero fees and zero advice is the next scheme to gather and control capital, and people, and is the unfortunate result of an industry which forgot that 'price is only a concern when value is in question.'" -  Bob Vukovich, Just One More

* Many thanks to the WSJ, Forbes, & Fortune for the above statistics and quotations.

** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.

** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com 

* SUBSCRIBE TO JAM VIEWS

* PLEASE USE THE BELOW SHARE BUTTONS TO SPREAD THE WORD!