Revisiting Old Haunts
I've written about 80 pieces for LinkedIn, (and this website) and I thought I would take a look back to see how they've held up. What triggered this was that my very first piece dealt with the effects or lower gas prices on the consumer and economy. (Jan 15, 2015) I noted that they wouldn't have any effect at all, and that proved to be correct by events. However, now that prices are back on the upswing, north of $3.00 a gallon again, the very same commentators who predicted a retail windfall from lower pump prices are now predicting that the economy will be dented by rising prices. Unless we hit a crisis level price well over $4.00 a gallon, I think we'll absorb this easily. It IS an inflationary input in transportation of goods, however.
One of the most popular pieces, with over 460 views, was “The Fed is Just KILLING Us With These Low Interest Rates.” As we can all see, now that the Fed Funds rate has been lifted, we have eliminated poverty, pension funds are flush, and for our retirees, it's non-stop Beluga caviar at the Early Bird Special. Vilification of the Federal Reserve is a big industry in this country, providing employment for thousands of hacks, who sell hundreds of thousands of books.
In July of 2015, I wrote about Economist Irving Fisher's “Debt Deflation” theory, which became newly relevant in the aftermath of the GFC. (A Forgotten Economist's Theory Comes Back to Life.) With so much capital being directed to extinguishing leverage, it was really hard to get the economy back in a strong growth mode. We can finally say that the Fed broke the back of the deflationary death spiral, which is precisely what QE and ZIRP were designed to do. For a while there, Fisher was like Elvis in the economics commentariat.
In September 2016, I wrote about retail's real estate problems, (Physical Retail's Long Shadow) but this article was a little off the mark as to its causes. No doubt the retail landscape has been going through some changes. It always is. But the main culprit turned out to be the massive leverage private equity firms had loaded onto these retailers and the replacement of experienced merchants with hedge fund managers who have no business running a lemonade stand. While some Americans are easily whipped into a frenzy about “unfair trade” practices, they would do well to confront our own self inflicted wounds enabled by these predators. They are effectively strip mining these companies until there's nothing left.
Another popular piece, nearing 500 views, was “Exploring Tax Cut Myths” which laid out the history of tax cuts as to their effectiveness in propelling the economy. The bottom line is, they're not. The latest experiment is already proving, predictably, to be a bust. A cynical, co-ordinated P.R. effort by dozens of firms to issue one-time $1000 bonuses, has not been followed up by any genuine wage growth or outsized CapEx. Again, taxation is about DISTRIBUTION, and a government with a fiat currency does not rely on revenues to fund operations. I covered that particular topic in “On National Debt Fear Mongering.”
I wrote a few pieces on global trade, tariffs, and their history. (Straight Talk on Free Trade, Steeling the Debate, The Fire This Time) As someone who personally saw nearly an entire industry disappear in front of his eyes, I think I bring a unique perspective to this issue. The armchair critics aren't impressed, and imagine a world where they can simply dictate policy to their personal needs, and are willing to pay off Congress to do it. It is absolutely horrifying to watch crowds of angry people so easily manipulated by a narrative of victimization. Yes, that IS “how Hitler did it.”
I wrote a fairly long and detailed piece on the dying coal industry, which got an effusive note of praise from Mr. Edward Alden, Senior Fellow of the Council on Foreign Relations, who knows the subject of globalization, job training and preparing for the future as well as anyone else in the country. Coal, predictably, continues to shrink as an energy source, not because of any environmental cabal, but because it's the Blockbuster Video of the energy complex. Coal fired plants continue to close at the same pace they have for years. When the U.S. pulled out of the Paris Accord, I wrote a piece as to how it was largely symbolic. (Withdrawal From the Paris Accord is Largely Hot Air, June 2017) No one will stop the future, and the transition to renewable and alternatives is continuing at a fairly rapid clip. Few notice, because it is transitional. There's no dramatic moment like a moon landing to cheer, but day by day, solar and wind become more economically viable, even without subsidies, and the continuing build out of these sources is going on all around the world. It won't make the national news, but to give just one local example, three coal plants that accounted for 22% of coal generated electricity for the state of Texas will close next year.
“The cost to generate electricity from coal plants varies from $60 to $143 per megawatt hour, compared to $48 to $78 for natural gas, according to a report last year from financial advisory firm Lazard. The unsubsidized cost for wind was $32 to $62.”
The coal story (Local Problems, Global Repercussions) was linked to South Carolina's success in transitioning from an old industry (textiles) to a new one (auto production) and avoiding the fate of Kentucky and West Virginia. While South Carolina's “Upstate” flourishes, those other states are still angry at the world, filled with bitter and resentful people. I hope these particular pieces gave people a measure of economic and historical context from them. It's not an easy issue to learn, and it has a long complex history behind it. It's easily given to simplistic explanations, and by no means do these few articles even scratch the surface. Mr. Alden's book, "Failure to Adjust" will march you through the history of this.
I wrote on alarmism in the financial press regarding credit card and auto loan use. It hasn't stopped, and the need to generate fear from clickbait is another powerful attention getter. It's still flowing through my news feed like salmon going upstream. Hard to believe, but there are renowned economists with social media followings in the hundreds of thousands who still can't figure out how to benchmark a metric per capita, or as a percentage of GDP, instead of raw dollars.
Lastly, I wrote what turned out to be a prescient piece on eliminating or curtailing the home mortgage interest deduction. While the tax “reform” act didn't enact it in the way that I thought it should have been done (i.e., grandfathering existing mortgages and phasing the deduction out to zero over the next decade) the idea wasn't a new one and I would like to think people who read it were a bit less surprised by its implementation, however ham-handedly. What is interesting is that the curtailment of the deduction hasn't had the slightest effect on home prices, which was my main objection to the deduction. Now that may be due to a phenomena in economics called "price stickiness," but those of us who lived through the Tax Reform Act of 1986 remember how quickly and ruthlessly real estate prices adjusted to the new tax code. So maybe this will take some time, but it's possible that low inventory and a demographic swing into homeownership is preventing or forestalling any price adjustment. For those who care, and I know you're out there, the proper term for this is "nominal rigidity." Note that the price of gasoline lacks "nominal rigidity."
I've enjoyed writing these pieces, and I hope they've filled in some of the blanks that the headlines and mass consumption media leave out. They're stories that don't get told in the kind of detail they should be, to a public that desperately needs it. So I make my small contribution here to explaining how things work, and hopefully people get to understand and appreciate how critical these economic issues are to their well being and place in the world.
The other reason for sharing this is because I believe understanding the mechanics of modern economics makes for better investment decisions. For years, I've looked at the products the sell side of Wall Street puts out: hedge funds, managed futures, inverse ETFs, emerging markets plays, all of them have cracked up and left retail investors holding the bag. Understanding the world we live in, instead of focusing on mere "product" or "sector" will produce better results with greater consistency. And that's what I try to do every day.