Cutting a Hole in the 4th Amendment

 

Hidden beneath the controversy stirred up last week by the publication of a book called “Fire and Fury,” a highly critical insider’s view of the Trump White House that the president has not only denounced on national television but also tried to prevent from being published and distributed, are the efforts of the Trump administration and congressional leadership to bypass the Fourth Amendment to the Constitution.

Here is the back story.

After the excesses of the Watergate era, during which the Nixon administration used the FBI and the CIA unlawfully to spy without warrants on the president’s real and imagined domestic political opponents, Congress passed the Foreign Intelligence Surveillance Act. FISA prohibited all domestic surveillance except that which is pursuant to warrants signed by federal judges.

The Fourth Amendment — which guarantees privacy in our persons, houses, papers and effects — permits the government to invade that privacy only when a judge has signed a warrant that authorizes surveillance, a search or a seizure. And judges may only issue warrants when they have found probable cause to believe that the government surveillance or invasion of the target’s privacy will produce evidence of criminal behavior. The Fourth Amendment further requires that the judicial warrant describe specifically the place to be searched or the person or thing to be seized.

All these requirements are in the amendment so as to prevent any court from issuing general warrants. Before the Constitution, general warrants were issued by British courts that met in secret in London. They were not issued based on probable cause of crime but issued based on the government’s wish to invade the privacy of all Americans living in the Colonies to find the more rebellious among them. This was the king and Parliament’s version of protecting national security.

General warrants did not describe the place to be searched or the person or thing to be seized. They authorized the bearer — usually a British soldier physically located in the Colonies — to search where he wished and seize whatever he found.

FISA did not interfere with the standard understanding or use of the Fourth Amendment by the government and the courts. But it did add another way for the government to invade privacy when its wish is to surveil people for national security purposes — a return to general warrants — as opposed to solely gathering evidence of crimes.

The FISA-created procedure, enacted in defiance of the Fourth Amendment — which makes no distinction between government evidence gathering and government intelligence-gathering — permits a secret court in Washington to issue general warrants based on the government’s need to gather intelligence about national security from foreigners among us. It pretends that the standard is probable cause of foreign agency, but this has now morphed into the issuance of general warrants whenever the government wants them.

Since 1977, the Foreign Intelligence Surveillance Court has issued well over 99 percent of the warrants that the government has requested. And these warrants do not specifically describe the place to be searched or the person or thing to be seized. A typical FISC-issued warrant authorizes government surveillance on all landlines, mobile devices and desktop computers in a given area or ZIP code. One infamous FISC-issued search warrant permitted the feds to surveil all Verizon customers in the U.S. — in excess of 115 million people — without any evidence of crime or even suspicion about any of them.

Now back to the Trump administration’s work below the radar. Even in the fresh aftermath of 9/11, when the government’s respect for constitutional norms was at a lamentably low point, the government interpreted the Fourth Amendment as requiring the government to separate its intelligence functions from its law enforcement work. The government recognized that its trigger for mass surveillance — namely, looking for a foreign agent among the populace — was a far lower standard than probable cause of crime, which is what the Fourth Amendment requires.

Today, the federal government’s computers are permanently connected to the mainframes of all telecoms and computer service providers in America, so the spying is in real time. Today, the federal government employs more than 60,000 domestic spies — one spy for every 5,500 Americans. Today, if any of them come across evidence of crimes while listening to your telephone calls or reading your texts or emails ostensibly for intelligence purposes, there is little they can do about it.

Until now.

Now, hidden beneath the “Fire and Fury” controversy is the muffled sound of the Trump administration and Republican congressional leaders plotting the enactment of an addition to FISA that would permit the use of evidence of crimes in federal court even when it is discovered during mass surveillance authorized by general warrants.

If enacted, this radical, unconstitutional hole in the Fourth Amendment would bring the country full circle back to the government’s use of general warrants to harass and prosecute — general warrants so odious to our forebears that they took up arms against the king’s soldiers to be rid of them.

I am surprised that President Donald Trump supports this. He has himself been the target of unlawful foreign surveillance and unconstitutional FISC-authorized domestic surveillance. “Fire and Fury” even quotes former British Prime Minister Tony Blair warning a newly elected Trump about this. And now he wants to unleash upon us all the voracious appetite for surveillance that was unleashed upon him and prosecute us for what is found, the Constitution be damned.

Whatever happened to the public promise to preserve, protect and defend the Constitution as it is written? That’s in the oath all in government have taken. That is the oath that the president and his Republican allies reject.

Are You One Of The 170 Million Americans Drinking Radioactive Tap Water?

According to a new bombshell report from the Environmental Working Group (EWG), tap water for more than 170 million Americans contains radioactive elements that may increase the risk of cancer. The group examined 50,000 public water systems throughout the United States and found from 2010 to 2015, more than 22,000 water utilities reported radium in treated water.

Radiation in tap water poses serious health threats, particularly for children, and women during pregnancy.

The most common radioactive element the EWG found was radium. Studies show that radium above the EPA legal limit may cause depression of the immune system, anemia, cataracts, fractured teeth, and of course cancer.

Radium is a naturally occurring radioactive element that resides on the earth’s crust. The EWG emphasizes that higher radium levels in tap water occur when uranium mining or oil and gas drilling exploration companies disturb the earth’s geology. The process triggers radiation called “ionizing because it can release electrons from atoms and molecules, and turn them into ions,” explained the EWG. The EPA warns that all ionizing radiation is carcinogenic, implying that radium above the EPA limit is all too prevalent in America and it could be causing lots of cancer.

In 158 public water systems serving some 276,000 Americans in 27 states, the EWG found that radium exceeded the federal legal ceiling for radium-226 and radium-228.

The EWG’s Tap Water Database covers six radioactive contaminants, including radium, radon, and uranium. The database shows radium-226 and radium-228 are the two most common forms of radiation in every state.

The EWG expresses frustration with the 41-year old federal drinking water standards that are not designed to protect human health. New public health goals were set in 2006 by the California Office of Environmental Hazard Assessment, but have been widely overlooked by the federal government.

Federal drinking water standards are based on the cost and feasibility of removing contaminants, not scientific determinations of what is necessary to fully protect human health. And like many EPA tap water standards, the radium limits are based on decades-old research rather than the latest science.

The EPA’s tap water limits on the combined level of the radium isotopes and the combined level of alpha and beta particles were set in 1976. They were retained in 2000, when the uranium standard was established.

To more accurately assess the current threat of radiation in U.S. tap water, we compared levels of the contaminants detected by local utilities not to the EPA’s 41-year-old legal limits, but to the public health goals set in 2006 by the respected and influential California Office of Environmental Hazard Assessment.

California public health goals are not legally enforceable limits, but guidelines for levels of contaminants that pose only a minimal risk – usually defined as no more than one expected case of cancer in every million people who drink the water for a lifetime.

California standards are hundreds of times more stringent than the current EPA limits for radium-226 and radium-228. If the federal government adopted the new tests, it would mean that no more than one case of cancer per million people per water supply. That would likely cause a public health emergency across the United States, but apparently, that is something the government has no intentions in doing in the intermediate time. So, for now, Americans will enjoy a higher risk of cancer one glass of water at a time, because, perhaps, cancer is very profitable for pharmaceutical companies, or the country is just flat broke and cannot afford new infrastructure.

“Most radioactive elements in tap water come from natural sources, but that doesn’t take away the need to protect people through stronger standards and better water treatment,” Olga Naidenko, senior science adviser at EWG, said in a statement.

“Millions of Americans are drinking water with potentially harmful levels of radioactive elements, but the outdated federal standards mean many people don’t know about the risk they face when they turn on the tap.”

Radium contamination in public water systems nationwide:

Radium concentrations in drinking water are drawn from EWG’s Tap Water database, and represent the average of all samples of treated drinking water collected from 2010 to 2015 for each water system. Samples reported as non-detections are entered as zero, which could underestimate the actual radium concentration in drinking water.

Federal drinking water regulations set a Maximum Contaminant Level, an enforceable legal standard, of 5 picocuries per liter (pCi/L) for the combined level of two isotopes of radium: radium-226 and radium-228. Some water utilities and states report individual levels of these isotopes, while others report a single combined radium value of a specific sample. When the combined level was not reported by the water utility, EWG added measurements of radium-226 and radium–228 to calculate it, as available.

This map displays radium data for 1,850 community water systems serving more than 10,000 customers, and 1,620 community water systems serving between 3,301 and 10,000 customers. The water system locations were mapped based on the Environmental Protection Agency’s Safe Drinking Water Information System, or SDWIS. Locations are approximate and are meant to visualize the general area served by a specific water system – not to give the specific address of the water treatment plant. The map does not include water systems that did not detect radium between 2010 and 2015. It also does not include those water systems for which EWG could not confirm geographic locations.

Click here for interactive version.

On the map, dots indicating water system locations are color-coded according to the combined radium levels. Dot size reflects the water system’s size of above or below 100,000 customers. Any changes in water sources and treatment, and water quality after 2015, are not reflected in EWG’s analysis. For more detail on data reporting methods for EWG’s Tap Water Database, read our Methodology.

Credit Card Debt Hits All Time High As Consumers Unleash Historic Shopping Spree

It’s official: the reason behind the recent rebound in the economy can be explained with two words: “charge it.”

Readers may recall that one month ago, we reported that with Republicans in Washington on the verge of passing their first major piece of legislation in the form of comprehensive tax cuts that will allow Americans across the income spectrum to keep a little more of their hard earned cash in 2018, it appeared that U.S. consumers already “pre-spent” their savings using their credit cards.

And now we have confirmation that this is precisely what happened, because in the month of November, between revolving, or credit card, and non-revolving debt, largely student and auto loans, according to the latest Fed data, total consumer debt rose by $28 billion, or the most since November 2001, to $3.827 trillion, an annualized increase of 8.8%, or roughly 4 times faster than the pace of overall GDP growth.

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Broken down, consumer credit rose by $11.2 billion in revolving credit, or credit card debt, which pushed it a record $1.023 trillion, the highest credit card amount outstanding on record. This was also the second highest monthly increase in credit card debt on record.

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Meanwhile, non-revolving credit – or auto and student loans – rose by $16.8 trillion to $2.805 trillion. Nonrevolving lending to consumers by the Federal government, which is mainly student loans, rose to $1.142t, on a non-seasonally adjusted basis.

This was to be expected: as we showed last month, US consumers appear to be tapping out, and as a result, the Personal savings rate dropped to 2.9%, the lowest since November 2007.

So, in addition to all the usual holiday trinkets that US consumers buy year after year, what hot new Christmas gadget has Americans suddenly willing to max out their credit cards?  Well, if Google search trends are any clue, it might not be a gadget, or anything tangible for that matter, at all.

Tesla Bonds Tumble – Now ‘Riskier’ Than Indonesia

After missing expectations for Model 3 deliveries (by 50%), delaying production goals once again, it appears the bond market is starting to give up on Elon Musk’s dreams for Tesla’s future.

While stocks are rebounding, bonds are not…

 

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In fact, Tesla’s 2025 bond – now dramatically below par – suffered its biggest drop yet today, heading back to lows on price…

 

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And for those who see Tesla’s juicy 6.13% yield and feel like “reaching” for it… may we suggest Indonesia instead…

 

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How long before Musk starts to discuss “Blockchain” implementations in Tesla’s product plan?

Why the U.S. Spends So Much More Than Other Nations on Health Care (Monopoly)

Studies point to a simple reason, the prices, not to the amount of care. And lowering prices would upset a lot of people in the health industry.

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CreditEvan Cohen

The United States spends almost twice as much on health care, as a percentage of its economy, as other advanced industrialized countries — totaling $3.3 trillion, or 17.9 percent of gross domestic product in 2016.

But a few decades ago American health care spending was much closer to that of peer nations.

What happened?

A large part of the answer can be found in the title of a 2003 paper in Health Affairs by the Princeton University health economist Uwe Reinhardt: “It’s the prices, stupid.

The study, also written by Gerard Anderson, Peter Hussey and Varduhi Petrosyan, found that people in the United States typically use about the same amount of health care as people in other wealthy countries do, but pay a lot more for it.

Ashish Jha, a physician with the Harvard T.H. Chan School of Public Health and the director of the Harvard Global Health Institute, studies how health systems from various countries compare in terms of prices and health care use. “What was true in 2003 remains so today,” he said. “The U.S. just isn’t that different from other developed countries in how much health care we use. It is very different in how much we pay for it.”

A recent study in JAMA by scholars from the Institute for Health Metrics and Evaluation in Seattle and the U.C.L.A. David Geffen School of Medicine also points to prices as a likely culprit. Their study spanned 1996 to 2013 and analyzed U.S. personal health spending by the size of the population; its age; and the amount of disease present in it.

They also examined how much health care we use in terms of such things as doctor visits, days in the hospital and prescriptions. They looked at what happens during those visits and hospital stays (called care intensity), combined with the price of that care.

The researchers looked at the breakdown for 155 different health conditions separately. Since their data included only personal health care spending, it did not account for spending in the health sector not directly attributed to care of patients, like hospital construction and administrative costs connected to running Medicaid and Medicaid.

Over all, the researchers found that American personal health spending grew by about $930 billion between 1996 and 2013, from $1.2 trillion to $2.1 trillion (amounts adjusted for inflation). This was a huge increase, far outpacing overall economic growth. The health sector grew at a 4 percent annual rate, while the overall economy grew at a 2.4 percent rate.

You’d expect some growth in health care spending over this span from the increase in population size and the aging of the population. But that explains less than half of the spending growth. After accounting for those kinds of demographic factors, which we can do very little about, health spending still grew by about $574 billion from 1996 to 2013.

Did the increasing sickness in the American population explain much of the rest of the growth in spending? Nope. Measured by how much we spend, we’ve actually gotten a bit healthier. Change in health status was associated with a decrease in health spending — 2.4 percent — not an increase. A great deal of this decrease can be attributed to factors related to cardiovascular diseases, which were associated with about a 20 percent reduction in spending.

This could be a result of greater use of statins for cholesterol or reduced smoking rates, though the study didn’t point to specific causes. On the other hand, increases in diabetes and low back and neck pain were associated with spending growth, but not enough to offset the decrease from cardiovascular and other diseases.

Did we spend more time in the hospital? No, though we did have more doctor visits and used more prescription drugs. These tend to be less costly than hospital stays, so, on balance, changes in health care use were associated with a minor reduction (2.5 percent) in health care spending.

That leaves what happens during health care visits and hospital stays (care intensity) and the price of those services and procedures.

Did we do more for patients in each health visit or inpatient stay? Did we charge more? The JAMA study found that, together, these accounted for 63 percent of the increase in spending from 1996 to 2013. In other words, most of the explanation for American health spending growth — and why it has pulled away from health spending in other countries — is that more is done for patients during hospital stays and doctor visits, they’re charged more per service or both.

Though the JAMA study could not separate care intensity and price, other research blames prices more. For example, one study found that the spending growth for treating patients between 2003 and 2007 is almost entirely because of a growth in prices, with little contribution from growth in the quantity of treatment services provided. Another study found that U.S. hospital prices are 60 percent higher than those in Europe. Other studies also point to prices as a major factor in American health care spending growth.

There are ways to combat high health care prices. One is an all-payer system, like that seen in Maryland. This regulates prices so that all insurers and public programs pay the same amount. A single-payer system could also regulate prices. If attempted nationally, or even in a state, either of these would be met with resistance from all those who directly benefit from high prices, including physicians, hospitals, pharmaceutical companies — and pretty much every other provider of health care in the United States.

Higher prices aren’t all bad for consumers. They probably lead to some increased innovation, which confers benefits to patients globally. Though it’s reasonable to push back on high health care prices, there may be a limit to how far we should.

Austin Frakt is director of the Partnered Evidence-Based Policy Resource Center at the V.A. Boston Healthcare System; associate professor with Boston University’s School of Public Health; and adjunct associate professor with the Harvard T.H. Chan School of Public Health. He blogs at The Incidental Economist, and you can follow him on Twitter. @afrakt

Aaron E. Carroll is a professor of pediatrics at Indiana University School of Medicine who blogs on health research and policy at The Incidental Economist and makes videos at Healthcare Triage. He is the author of “The Bad Food Bible: How and Why to Eat Sinfully.” @aaronecarroll

A version of this article appears in print on , on Page B1 of the New York edition with the headline: Where U.S. Health Care Stands Out: Price. Order Reprints | Today’s Paper | Subscribe

Lacy Hunt On The Unintended Consequences Of Federal Reserve Policies

 

The Financial Repression Authority interviewed Lacy Hunt, Chief Economist at Hoisington Management on Fed policies.

The interview below first appeared on the FRA website along with a video.

The emphasis in italics is mine.

FRA: Hi, welcome to FRA’s Roundtable Insight. Today, we have Dr. Lacy Hunt. He’s an internationally recognized economist and the Executive V.P. and Chief Economist of Hoisington Investment Management Company, a firm that manages over $4.5 billion USD and specializing in the management of fixed income accounts for large institutional clients. He also served in the past as Senior Economist for the Federal Reserve Bank of Dallas, where he was a member of the Federal Reserve System Committee on Financial Analysis. Welcome. Dr. Hunt.

Dr. Lacy Hunt: Nice to be with you, Richard.

FRA: Great. I thought we’d have a discussion on a variety of topics relating to the economy and the financial markets. You recently mentioned that you thought this was the worst economic expansion recovery in U.S. history since 1790. Wow. Can you elaborate?

Dr. Lacy Hunt: If you calculate the average growth rate in the expansions since 1790, this is a long-running expansion, but it’s the slowest and in the last 10 years the household sector lagged very, very badly. The rate of growth in real disposable household income per capita is only 0.9 percent per year. And in the last 12 months, we’re up only 0.6 percent per year. So it’s a long-running expansion, but it’s been a poor expansion. There are certainly problems with some of the earlier data, but this appears to be the slowest expansion since the turn of the 18th Century and our households are the main problem for the growth rate lag.

FRA: And do you point a finger for this cause as primarily on the Federal Reserve or do you see structural changes happening to the economy?

Dr. Lacy Hunt: I think that the main element suppressing growth is the heavily leveraged U.S. economy. We have too much public and private debt, and this debt does not generate an income stream for the aggregate economy. As a result of the prolonged indebtedness, which is on the verge of going much higher because of problems in the governmental sector, the economy is now experiencing very poor demographics. We have a baby bust, a household formation bust, and the lowest birth rate since 1937. These demographics are exacerbating the problems because we have too much of the wrong type of debt and thus the velocity of money has been falling since 1997. Velocity this year is only 1.43 percent, which is the lowest since 1949. Furthermore, the debt creates a situation where monetary policy capabilities are asymmetric. In other words, a lot of action is needed to provoke even a muted impact on the economy, whereas the slightest monetary tightening goes a long way in depressing economic activity. So the root cause of this underperformance is extreme indebtedness.

FRA: And what about the Federal Reserve? How has it undermined the economy’s ability to grow?

Dr. Lacy Hunt: The Fed’s most serious mistake was made in the 1990s up until 2006 during which they allowed the private sector to become extremely over-indebted with the wrong type of debt. And, in essence, I think that quantitative easing, through the push for higher stock prices, created more problems than it has solved for the economy. QE caused the corporate executives to switch funds from real capital investments into financial investments through the paying of higher dividends, buying shares of their own companies, and buying back their shares from others. While this type of action does produce a higher stock market; it doesn’t generate a higher standard of living. And so, Federal Reserve policy has not improved the economy, although it certainly has well served components of the economy.

FRA: And due to that do you think that there’s been too much financial investment versus real economy investment in terms of diverting the economic financial resources away from the real economy?

Dr. Lacy Hunt: I think that’s the principal problem. Business debt last year reached a record high relative to GDP. As I said earlier, Fed policies have created a higher stock market but have not generated an improved standard of living. When the Reserve undertook quantitative easing, it was a signal to the corporate executives that the Fed preferred and would protect financial investments. But that meant financial assets were preferred over real side investments. And so QT is intermingling with the growth-depressing effects of too much debt. And the debt levels are getting ready to move substantially higher in our governmental sector. Government debt is already approaching 106 percent of GDP, a record high with the exception of a brief period during World War II. And by 2030, federal debt will be approximately 125 percent of GDP. For a long time, we’ve known about the issues that would inflate the entitlements — such as the prior-mentioned demographic problems — but there is an increasing likelihood that new federal programs with expenditure increases will further accelerate the growth in federal debt. I think there is clear evidence that increases in federal debt at these high levels relative to GDP over any measurable length of time, reduces economic activity. Thus, the multiplier is not a positive but negative figure, or otherwise exactly what economist David Ricardo hypothesized in his 1821 work. I have looked at the relationship between per capita changes in real GDP and government debt per capita and the relationship is negative, not positive. And so, we’re trying to solve an indebtedness problem by taking on more debt. You can get intermittent spurts of economic activity and inflation, but ultimately the debt is a millstone around the economy’s neck.

FRA: So would you say that we have migrated to a sort of financial economy?

Dr. Lacy Hunt: Let me give you a couple of examples. There’s so much liquidity in the financial markets, particularly the stock market, that a lot of the economic news is constructively interpreted even when it’s unconstructive. Virtually the world believes that the United States is experiencing large job gains and the idea that such productivity may be incorrect is hardly considered. But the rate of growth in payroll employment on a 12-month basis peaked at 2.4 percent in early 2015 and for the last 12 months, has sunk to 1.4 percent. What is even more critical — if you look at just the expansions and don’t include the recessions since 1968 – is that the average growth in employment in an expansion year was 1.9 percent. And in the last 12 months, we are half a percentage point under that figure. Yet, given these numbers, there is an erroneous perception that the employment gains are strong. And this view undermines the improvement in the standard of living. And because of the liquidity and the need of some investors to fully participate in the rising stock market, investors tend to overlook other important developments. If we go back to the 12 months ending November of 2015, real average hourly earnings were up about 2.5 percent. And in the latest 12 months, real average hourly earnings gained a miniscule 0.2 percent. The liquidity tends to push the focus away from the more realistic interpretation of the economy for certain types of assets.

However, the weak performance overall and the deceleration in some of the indicators that I just referred to is not unnoticed by the bond market. So, we have a dichotomy in which the stock market is strongly up but the long-term bond yields are down. Now, the short-term yields are up because they are under the control or heavy influence of the Federal Reserve. The Federal Reserve is in the process of raising the short-term rates and winding down their portfolio. They sold 20 billion dollars of government agency securities in October and November, pushing up the short-term rates. Erstwhile, the long-term rates — which look at some of the more important economic fundamentals — are actually declining.

Another element not in the public understanding, since the Federal Reserve no longer produces this sort of monetary analysis, is a very sharp slowdown in the money supply’s rate of growth, bank loans, and within important credit aggregates. Last year, the M2 money supply was up 7 percent. In the latest 12 months, it decelerated to less than 4.5 percent. The rate of growth in bank loans and commercial paper, which topped out on a 12- month basis about 9 percent, is now under 4 percent. So the Fed is raising the short-term rates, reducing the monetary base, and causing a tightening in the financial side of the economy. Some investors understand what is happening and yet it’s not in the general psyche because such monetary analysis is increasingly rare.

However, another more public indicator is the very dramatic flattening of the yield curve. And when the yield curve flattens in such a way, first of all, it’s a symptom that monetary restraint is beginning to bite. Now, the slowdown in money supply growth and the bank credit flattening of the yield curve will occur well before there is any noticeable impact on a broad array of economic indicators or long lags in monetary policy. But when the yield curve starts flattening, that intensifies the effect of the monetary tightening because it takes away or, at the very least, greatly reduces the profitability of the banks and all those that act like banks. Banks make a profit by borrowing short and lending long. When those spreads recede, bank profitability is hurt, particularly for the higher, riskier types of bank loans since not enough spread exists to cover the risk premium. So the banks begin to pull back, further intensifying the restraint pressing on economic growth. To the vast majority of investors, we have an economy that is apparently doing well, but in fact there are elements right beneath the surface that strongly suggest to me that the outlook for 2018 is considerably more guarded than conventional wisdom implies.

FRA: And do you see the potential for an inverted yield curve in the near future?

Dr. Lacy Hunt: I’m not sure that we will have to invert because the economy is so heavily indebted and the velocity of money is its lowest since 1949. Now, a number of people have pointed out that we typically invert before a recession and historically such inversions have been the case most of the time — but not always if you go back far enough in time — and you should since this is not a normal economy. For example, money supply growth since 1900 has averaged about 7 percent per annum, whereas, currently, the rate of growth in M2 is about 36 percent below the long-term average, indicating a very weak growth rate. And the velocity of money is lower than all of the years since 1942 — with the exception of 7 years — and the economy has never been this heavily indebted. And so the yield curve could possibly approach inversion, but it may or may not occur or stay there very long because at that stage of the game, the flattening of the yield curve will greatly intensify all the other effects — the reduction in the reserve, monetary, and credit aggregates, as well as the weakness in velocity. And when this reduction becomes apparent, the Federal Reserve will not be able to reverse gears quickly enough to ameliorate the impact produced upon future economic growth.

FRA: So do you still see a secular low in bond yields on the long into the yield curve remaining in the future sometime?

Dr. Lacy Hunt: The lows have not been seen. The path there will remain extremely volatile. We will have episodes in which the long yields rise. My attitude is that the long yields can go up over the short run for any number of causes. While many elements work out of the system in the long end, yields cannot stay up. When yields go up — especially now that the yield curve is flattening — this intensifies monetary restraint, which puts downward pressure on commodities. This puts upward pressure on the value of the dollar and cuts back on the lending operations. Something I think has been somewhat overlooked in general euphoria over the strength of economic indicators, is the that commercial and industrial loans for all of the banks in the United States are now only up one-tenth of one percent in the last 12 months. There are forward-looking elements that have historically been very important for signaling that change is ahead. They don’t tell us the timing — timing is always difficult — but they are flashing signals that should be observed.

FRA: And as this plays out, do you see monetary policy and fiscal policy is changing, like will we get fiscal policy stimulus? Will there be a change in monetary policy and how will that look like?

Dr. Lacy Hunt: Here’s my attitude: the new federal initiatives, whether tax cuts or infrastructure or otherwise will not provide a boost to the economy if they are funded with increases in debt — that’s where we’re at. And by the way, it’s been that way for some time. If you go back to 2009, we had a one-trillion-dollar stimulus package that was said to be inflationary and was going to boost economic growth, but yet we still had this very poor expansion and little inflation except for intermittent bouts here and there, largely from highly-priced inelastic goods. All the while, the inflation rate has trended lower.

For example, when President Reagan cut taxes, government debt was 31 percent of GDP and now that’s 106 percent on its way to 120-125 percent. And so if you go back and if you read Ricardo’s great article in 1821, he was asked whether it made a difference as to whether the Napoleonic wars were financed by taxes or by borrowing. Ricardo said that, theoretically, either way private sector activity was going to be suppressed. Now we have a lot of evidence, including some that I produced, that the government multiplier is negative, not positive, over a three-year period. Thus, the tax cuts may work for a very short while, but not on balance. And if the tax cuts were revenue-neutral and financed by reductions in government expenditures that would be a positive since the evidence shows tax multipliers are more favorable than expenditure multipliers. Such a theoretical proposal would provide greater efficiency for private sector spending and government spending. There’s also evidence that you would lower the cost of capital, but that’s not what we’re talking about is it? We’re talking about a debt-financed tax cut and we’re not talking about a revenue-neutral infrastructure plan, just as we were not talking about a revenue-neutral stimulus package in 2009. We’re talking about the debt-financed variety of tax cuts and at this stage of the game, this will make us more vulnerable, except for a few fleeting instances.

I will say this: when you have a debt-financed infrastructure program or tax cut, there will be pockets within the economy that will benefit, but the aggregate economic performance will not benefit and so fiscal policy, as I see it, is not really going to be helpful. The risk is that the debt buildup will add to the problems. There is extensive academic research indicating that when government debt rises above 90 percent of GDP for more than five years, this trend will reduce the economy’s growth rate by a third. Remember, we’re at 106 percent debt to GDP and there’s evidence these higher levels of debt have a non-linear effect. In other words, we use up growth at a faster pace. And there’s a lot of evidence from the available data that we’re even losing a half of our growth rate from the trend. For example, GDP has risen at 2.1 percent per capita since 1790. The latest 10 years produced a reduction to 1.0 percent. And so we should have lost only seven-tenths or come down at 1.3 over 1 but we didn’t and this is a consequence that we have to deal with. We’re not in a position to ignore the debt levels. Fiscal policy can be talked about, we can debate about it, and we can proclaim its benefits, but I don’t see them in the current environment just as I didn’t see them in 2009. I would change my tune if they were revenue-neutral, but that’s not the issue here.

To me, inflation is a money-price-wage spiral not a wage-price spiral as with the Phillips curve. The way inflations begin is by money supply growth acceleration not being offset by weakness in velocity, which shifts the aggregate demand curve inward. Remember, the aggregate demand curve is equal to money times the velocity by algebraic substitution as evidenced in all the leading textbooks on macroeconomics. So you have declines in the money supply and velocity, which will make the aggregate demand curve shift inward over time. This shift gives you a lower price level and a lower level of real GDP. It doesn’t happen every quarter or even every year, but it’s the basic trend. Thus, monetary policy is in the process not of decelerating money supply growth and by a significant amount. If the Fed adheres to their schedule of quantitative tightening, I calculate M2 will grow by the end of the first quarter – it’s currently running around four and a half percent – and the year over year growth rate will be down to less than 3 percent. And so monetary policy is taking steps to lower the reserve monetary and credit aggregates, and these actions will further flatten the curve because they can press the short rates upward. But I think the long-term investors will understand that the inflationary prospects on a fundamental basis are weakening not strengthening.

FRA: And do you see these trends as being exacerbated on the emerging government pension fund crisis? Could there be more debt used to solve that like for bailouts? Do you see that potentially happening?

Dr. Lacy Hunt: Well the main problem with government debt is that we’re going to have approximately one million folks a year reach age 70 in the next 14 to 15 years and we’ve known that this was coming, but we didn’t prepare for it. We’ve made a lot of promises under Social Security Medicare and the Affordable Care Act and government debt will have to be used to fund the entitlement benefits — I don’t see any other way around it. Another overlooked problem is that the actual federal fiscal situation is much worse than these surface numbers. For example, in the last three years, the budget deficit worsened each year. If you sum the budget deficits for 2015, 2016 and 2017, the sum is 1.2 trillion, but a lot of what was previously called “outlays” have been moved off budget — we call them investments (such as student loans) and there are other examples. The actual increase in federal debt in the last three years is 3.2 trillion. So the budget deficit is actually greatly understating what is happening to the level of federal debt which wasn’t always the case. Furthermore, the deficit was made worse by a 2015 bipartisan deal between Congress and the White House. And while neither party is blameless — they both agreed on the deal — yet it doesn’t change the fact that the federal situation is deteriorating and at a much worse rate than the deficit numbers themselves indicate.

FRA: And what about for state and local jurisdiction locales, in terms of their government pension funds? Could there be federal level bailouts at that level?

Dr. Lacy Hunt: Again, what are they going to bail them out with? You’re going to have to sell Federal Securities. And one of the multipliers on new sales of Federal debt is negative, not positive. Forget what was taught you in your macroeconomic class 30, 20, or even 15 years ago. When I was in graduate school, I was taught that the government multiplier was somewhere between four and five percent. Now, it looks like the multiplier is at best zero and even possibly slightly negative.

FRA: Great insight as always. How can our listeners learn more about your work, Dr. Hunt?

Dr. Lacy Hunt: We put out a quarterly letter as a public service. Write to us at hoisingtonmgt.com and we’ll put your name on the subscription list. We don’t spam you with marketing so please go ahead and subscribe.

FRA: Okay, great. Thank you very much for being on the Program, Dr. Hunt. Thank you.

Dr. Lacy Hunt: My pleasure Richard. Nice to be with you

Economics as Taught

Note Lacy’s comments on what he learned in graduate school. Lacy once told me that he had to “unlearn” nearly everything he was taught in school about economic.

Multiple generations of economists have been trained to believe inflation is a good thing, saving is bad, that there are no consequences for piling up debt.

What The GOP Pols Have Wrought – A Fiscal, Economic And Political Monster

The GOP tax bill is not “at least something”. It’s not “better than nothing”. And, no, we are not letting the perfect become the enemy of the good.

In truth, this thing is a fiscal, economic and political monster. It is hands down the worst tax bill enacted in the last half-century—-maybe even since FDR’s 1937 soak-the-rich scheme, which re-ignited the Great Depression.

True, rather than soak them, the GOP’s bill will pleasure America’s wealthy with a bountiful harvest of tax relief. Owners of public equities, for example, will garner a trillion dollar shower of extra dividends and stock buybacks from the corporate rate cut.

Likewise, 4 million top bracket ATM (alternative minimum tax) payers will be relieved of about $80 billion per year of Uncle Sam’s extractions; around 5,000 dead people per year with estates above $20 million will get to leave more behind; owners of real estate will be able to deduct another 20% of property income that isn’t already sheltered by depreciation and interest deductions; and tax accountants and lawyers will become stinking rich helping America’s proprietorships (24 million), S-corporations (4 million), partnerships (3.5 million) and farms (1.8 million) convert their “ordinary income” into newly deductible “qualified business income”.

Notwithstanding these facts, the commonality between the FDR’s tax bill disaster and this one is that both represent exactly the wrong policy at a time which could not be worse.

In the New Deal case, business and investor confidence had finally begun to recover after the trauma of the Crash and subsequent withering depression, but FDR’s excess profits tax and punitive marginal rates on high incomes sent the economy tumbling until it was rescued by war mobilization after 1940.

In the current situation, the absolute worse thing you could do is draw on Uncle Sam’s credit card to fund temporary cuts for the middle class and a permanent windfall to the top 10 percent of households which own 80% of the stock. And the reason, of course, is that America is marching straight into a 20-year fiscal and demographic trap that has the potential spiral out of control and smoother any semblance of economic prosperity as we have known it.

Indeed, the signal event of 2017 is not the gimmick-ridden dog’s breakfast of K-street favors being enacted today, but the GOP’s utter failure to repeal and reform ObamaCare.

As we have long insisted, America’s health care system consists of the worst of both worlds. It amounts to socialism for the beneficiaries, which generates uncontainable demand via third-party paid, cost-averaged pricing; and crony capitalism for the providers, where delivery system cartels of doctors, hospitals, nursing homes, pharma suppliers, medical device makers etc. have implanted themselves deep on K-street and have thereby rigged reimbursement systems for maximum private revenue gain (and minimum system efficiency and competitive discipline).

That’s why the US spends 18% of GDP on health care compared to 10-12% in the rest of the (socialistic) developed world, on the one hand; and why the GOP couldn’t lay a glove on ObamaCare, which embodies in spades this “worst of both worlds” paradigm.

Indeed, there is no hope to slowdown the health care monster without restoration of consumer sovereignty and responsibility, risk-based pricing and free market supplier arrangements. Yet only Rand Paul got close to presenting a mild semblance of these necessary cures from the far stage-right periphery of the debate, where he was completely ignored by his GOP colleagues.

Not surprisingly, there is now no prospect of stopping the relentless rise of current law health care spending. Over the next two decades, Uncle Sam’s cost burden will double as a share of GDP.

Toss two other factors on top of the above chart—-the Washington War Party and the aging out of the Baby Boom—and you have an impossible fiscal equation. That is, a tax system under current law that is impaled on the 18% of GDP marker in terms of revenue collections versus a spending machine that is inexorably climbing toward 30% of GDP.

That’s right. The Donald has already succumbed fully to the neocons and the insatiable fiscal demands of the War Party. Thus, the enacted defense budget now stands at $700 billion and on top of that comes the $250 billion annual tab for past unnecessary wars (Veterans and debt service) and $50 billion more for Imperial Washington’s walking around money to fund military assistance, foreign aid and political skullduggery all around the planet.

In short, the Warfare State alone consumes $1.0 trillion per year or 5% of GDP and there is not a corporal’s guard in the Imperial City of a mind to challenge it.

And especially not now after the so-called “progressive left” has gone full bore McCarthyite on the Russkies and their purported threat to national security. That is, the danger posed by a midget $60 billion military and a pipsqueak economy, which sports a GDP ($1.3 trillion) roughly equal to that of the NYC metro area. (For our money, the latter is actually more the threat to national well-being)

Then you have 60 million social security recipients at $1.1 trillion in FY 2019 that will balloon to 80 million enrollees by the end of the 2020s, and eventually to 95 million recipients after the full measure of the Baby Boom demographic bubble cashes in its social insurance chips.

Finally, there is the compounding feedback loop of net interest: $350 billion today at a drastically suppressed weighted average yield of less than 2.o%; $820 billion by 2027 under more normalized yields and the CBO debt “baseline” before you count the massive interim deficit add-ons of the Trumpian-GOP borrowers; and into the trillions per year and rising in the following decade as spending escalates toward 30% of GDP. And even that’s assuming interest rates don’t get unruly but remain “normal “(weighted average of 3.4%) as far as the eye can see.

In a pattern which is discernible and inexorable, therefore, the nation’s fiscal accounts are being drawn-and-quartered by the embedded policies and gross financial irresponsibility of today’s Imperial City politicians.

As it stands, the Federal revenue baseline currently weighs in at 17.7% of GDP, which is as low as it’s been aside from recession years since 1980; and about exactly where the great tax-cutter, Ronald Reagan, left it to his successor in 1989 (17.5% of GDP). So the fact that real final sales ( GDP without the inventory fluctuations) growth of 3.5% per year during the 1980s has dwindled to a pathetically low 1.2% per annum over 2007-2016 is not due to some nefarious tax grab.

Stated differently, Imperial Washington loves to borrow, not tax. It’s operative fiscal model is Big Government and Small Taxes—–notwithstanding 10,000 Lincoln Day dinner speeches per year in which GOP orators tilt at the windmill of high taxes.

To be sure, lower taxes earned by first effecting a drastic shrinkage of government is always a worthy aspiration, and not entirely unrealistic. After all, President Dwight Eisenhower did just that—shrank the Pentagon side of the swamp by 40% in real terms in order to balance the budget and pave the way, ironically, for the ballyhooed “Kennedy Tax Cut” a few years later.

But this week Ike’s Republican heirs and assigns have surely caused the great man to rollover in his grave. Without lifting a finger to cut spending, and actually adding upwards of $200 billion in FY 2019 alone, as we documented yesterday, the Trumpian GOP is crowing loudly about what amounts to a sheer fiscal folly.

As we also previously explained, the tax bill is drastically front-loaded in order to scam the 10-year reconciliation rules (more below). Accordingly, the “static” revenue loss in FY 2019 is $280 billion, according to the Joint Committee on Taxation.

That not amounts to borrowed goodness equal to 1.4% of GDP. Yet, apparently, there is not even a single supply-sider—outside of an institutionalized domicile—-who would argue that just 10 months hence there will be a tsunami of jobs and growth and therefore revenue reflows owing to this giant hole in Uncle Sam’s cash box.

In fact, what is actually happening here is that the American public is being lied to by the GOP Pinocchio Brigade in a manner that is egregious even by Washington standards.

That is, it is being offered a giant (but disappearing) election-year tax cut which brings Federal receipts down to 16.4% of GDP in what would be the 10th year of a business expansion and the longest in recorded US history; and which would also be well below the 17.3% of GDP revenue average during the Gipper’s celebrated anti-tax tenure in office.

But being on the very low side of history is no virtue for a K-street and PAC-owned political party that has no plan or stomach whatsoever for taking on the spending machine that is cranking inexorably toward 30% of GDP. And, also, a party which should spare us the cant about next year’s aspiration to reform welfare.

The fact is 75% of the Federal government’s $600 billion per year for means-tested welfare is accounted for by Medicaid, and the GOP has already punted big time on that one during the “repeal and replace” debacle. So perhaps they can find $5 billion to extract from maligners on the $100 billion food stamp and family assistance program. Of course, that would amount to 0.02% of GDP for all the trouble.

In short, the GOP pols have paddled around the fetid waters of the Imperial Swamp so long that they apparently think the American public does spend its time riding around on a hay wagon. There is surely no other way to explain how they plan to sell to the American public a dopey theory that you can have spending policies which rise toward 30% of GDP and a tax burden at 16%.

When all is said and done, the picture below dramatizes the giant fiscal trap that is now built-in, and which the GOP’s tax folly would only make far worse because, at best, the now enacted tax bill boils down to the mother-of-all-riverboat gambles.

We are speaking, of course, of the growth dividend fantasy, and the risible idea that driving next year’s deficit to $1.275 trillion (see Part 1)won’t compound the debt problem in the long run because the outyear revenue loss will all be made up for with incremental growth, jobs, incomes and tax revenues.

Not a chance. Doubling the child credit and lowering the marginal rate schedule by a few points with borrowed funds, for example, will put money in the pockets of the household sector and extract it from capital spending—now that the Fed is out of the debt monetization business.

Likewise, the GOP revilers have gifted ATM payers with a $637 billion tax break over the next eight years, and for that, the “donor class” will surely be grateful. But thankful as they may be, we are also quite sure that the 4 million beneficiaries of this tax cut will not any hours to their work schedules or invest any more productively than they have been doing in the US economy—even if the do bid up charter rates on luxury yachts and net jets.

When all the sunsets and temporary middle-class breaks are set aside, the heart of the bill is a $1.76 trillion revenue loss over 10 years for the 21% corporate rate and the 20% pass-thru deduction for “qualified business income”. Yet as we will demonstrate in Part 2, there is every reason to believe that upwards of 90% of that massive increase to the Federal debt will be recirculated back to Wall Street and the top 1% and 10% of households in the form of increased stock-buybacks, dividends and other forms of capital return.

Just consider the case of Microsoft which employed upwards of 130,000 worldwide—including about 200 in Puerto Rico, 700 in Singapore and1100 in Ireland. So if headcounts in a high tech firm are a reasonable proxy for output, Mr. Softie’s production in these three tax havens amounts to just 1.5% of its worldwide total.

By contrast, its books upwards of two-thirds of its taxable income in these jurisdictions thanks to state of the art tax planning and the off-shoring of billions of “intangible assets” to havens where the tax rates are 2.0%, 7.3%, and 7.2%, respectively.

What we mean is that Microsoft off-shored its tax books, not its production and jobs. The rate reduction to 20%, therefore, will not bring back jobs and investment but only rearrange its tax books—even as it deploys the higher after-tax cash flows to shareholder returns.

At the end of the day, the GOP has set up a scheme of massive borrowing and tax sunsets and deferrals that will knock the stuffing out of what remains of Washington’s capacity to manage the nation’s fiscal disaster in the years ahead. Heading for the scenario below, it chose to embrace K-street

These PE Firms Are About To Get Crushed By Their Subprime Auto Bets

In the aftermath of the ‘great recession,’ private equity firms placed massive bets on subprime auto finance companies with the typical “thesis” going something like this: “well, people have to get to work don’t they?”…genius, if we understand it correctly.

Of course, the “thesis” seemed to be confirmed when auto securitizations performed relatively well throughout the financial crisis, amid a sea of mortgage bonds getting wiped out, and private equity titans were off to the races with wall street titans from Perella Weinberg to Blackstone and KKR scooping stakes in small niche lenders.

Unfortunately, as Bloomberg points out today, the $3 billion bet on subprime auto lenders hasn’t played out precisely to plan as the “well, people have to get to work” thesis has proved to be somewhat less than full proof.

Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.

 

Since the turn of the decade, buyout firms, hedge funds and other private investors have staked at least $3 billion on non-bank auto lenders, according to Colonnade. Among PE firms, everyone from Blackstone and KKR & Co. to Lee Equity Partners, Altamont Capital and CIVC Partners waded in.

 

Many targeted smaller finance companies that often catered to the least creditworthy borrowers with nowhere else to turn. Overall, subprime car loans — those extended to people with credit scores of 620 or lower — have increased 72 percent since 2011. Last year, about 20 percent of all new car loans went to subprime borrowers.

 

“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” said Chris Gillock, managing director at Colonnade Advisors, a boutique investment bank. But right now, “it’s about as out-of-favor a sector as I can think of.”

Of course, the turnaround strategy was ‘simple.’ Given that subprime auto collateral held up well during the great recession, private equity investors figured they were sitting on rock-solid collateral that would holdup under even the most egregious loosening of underwriting standards.  Therefore, given that there was ‘no downside’, lenders wholeheartedly embraced deteriorating underwriting standards, like stretching out terms so borrowers could ‘afford’ cars they couldn’t really afford, as a way to grow their loans books. 

Alas, it didn’t work out as planned as subprime delinquencies are suddenly soaring and used car prices are tanking…making profits somewhat elusive.

Take Exeter. The company, which is licensed in all 50 states and works with roughly 10,000 dealerships, hasn’t been profitable since 2011, when Blackstone took a majority stake, an S&P Global Ratings report in September showed. That’s after the PE firm invested $472 million to help Exeter expand and cycled through three CEOs at the lender.

 

On a pretax basis, Exeter turned a profit in 2016 and 2017, according to Matthew Anderson, a spokesman at Blackstone. He added the New York-based firm hasn’t tried to sell the lender.

 

Blackstone may look to unload Exeter later next year, said a person familiar with the matter, who asked not to be identified because it’s private.

 

Bad loans remain an issue. This year, a rash of delinquencies in two bonds stuffed with loans that Exeter made in 2015 caused the securities to dip into their extra collateral to keep investors whole.

 

Another example is Flagship, which Perella Weinberg bought in 2010. (Innovatus Capital Partners, which manages the lender on behalf of Perella Weinberg, was formed by former Perella Weinberg managers last year after they split from the firm.)

As it turns out, the “well, people have to get to work” thesis only works to the extent that auto manufacturers maintain some level of discipline and refrain from exploiting their captive finance companies to flood the market with new supply…a move which will eventually lead to crashing used car prices and massive subprime securitization losses.

Unfortunately, as we pointed out last month, a review of the latest Fed data on auto loans underwritten by “Banks and Credit Unions” compared to those loans provided by “Auto Finance” companies prove that the nightmare scenario is playing out for subprime lenders…

First, taking a look at auto loans provided by traditional banks and credit unions, one can see some marginal deterioration in subprime auto loans.  That said, the deterioration is certainly nothing substantial with 90-day delinquencies pretty much in line with 2004/2005 levels and no where near the rates experienced in 2008/2009.

 

 

But, a drastically different picture emerges when looking at just the auto loans originated by America’s auto finance captives.  To our great ‘shock’, auto OEMs in the U.S. seem to have been much more “flexible” on underwriting standards over the past couple of years resulting in delinquency rates that nearly rival those last experienced at the height of the great recession.

 

Of course, we’re sure that GM Financial and Ford Motor Credit just got unlucky with their deteriorating credit portfolios…certainly, they would never knowingly attempt to game their own short-term financial success by putting millions of Americans into cars they can’t possibly afford, right?