Month: August 2024

Authored by Mike Shedlock via MishTalk.com,

Greg Ip says the conditions for recession are not in place. I disagree. And I show where and how he went wrong.

The chart itself explains where Ip went wrong. See if you can figure it out.

“This Doesn’t Look Like Recession” Says Greg Ip

Please consider This Doesn’t Look Like Recession. Here’s How One Could Happen.

Unemployment is rising, stocks are falling and bond yields are well below short-term interest rates. These are all telltale signs of recession.

But a closer look suggests that while recession risk has risen, the U.S. isn’t in one now. The distinction is crucial because it means it isn’t too late to head off a downturn. It all depends on the Fed, and on the unpredictable moods of investors, consumers and employers.

The increase in unemployment to date, according to a rule-of-thumb popularized by the economist Claudia Sahm, in the past has only occurred during recessions.

To decide if it’s raining, it’s better to stand outside than count umbrellas. Similarly, to determine whether recession has begun, better to look at the indicators the NBER uses than the Sahm rule. Three—payroll employment, industrial production and real (inflation-adjusted) incomes, minus government transfers—were all shrinking in the four months up to and including the month the Sahm rule was triggered, in 1990, 2001 and 2008. In all three, a recession had begun several months earlier.

In the four months through July, payrolls were growing, and in the three months through June, so were real incomes and industrial production. If a recession had already begun, it would be a very unusual one. (Sahm said last week she didn’t think a recession is imminent).

Background on the McKelvey (Sahm) Rule

Edward McKelvey, a senior economist at Goldman Sachs, created the indicator.

Take the current value of the 3-month unemployment rate average, subtract the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started.

Claudia Sahm, a former Federal Reserve and White House Economist, modified the indicator from 0.3 to 0.5.

Please consider The Sahm Rule: Step by Step written December 7, 2023 by Claudia Sahm.

I created the Sahm rule, and it’s on me to communicate it well. I try. If you have any questions, please add them to the comments.

Sahm claims to have invented the rule. However, credit should go to Edward McKelvey, at Goldman Sachs.

The Lag Effect

Sahm modified the McKelvey rule to eliminate false positive. But that was at the expense of being far less timely.

In the 2008 recession, the Sahm rule triggered three months late. In the 1973 recession, Sahm triggered 7 months late.

Ip’s Huge Mistake

Ip’s huge mistake is comparing conditions in place when the rule triggers instead of conditions when the recession began.

Ip shows 4-month sum pf payrolls as negative, when in fact, they were positive.

Change in Nonfarm Payrolls Oct 2007-Jan 2008

• Oct: +72,000

• Nov: +116,000

• Dec: +105,000

• Jan: +1,000 Recession Start

Every month was positive, including the start of the recession.

Change In Nonfarm Payrolls Using Sahm Trigger

• Jan: +1,000

• Feb: -71,000

• Mar: -70,000

• Apr: -219,000 Sahm Trigger (was this remotely useful?)

The Sahm rule did not trigger until three months into the recession when payrolls were -219,000.

And look at December 2007. Despite a report of +105,000. It was clear recession was unavoidable.

Bernanke did not see recession until April, when it obvious to the world.

Industrial Production Index Oct 2007-Jan 2008

• Oct: 101.6

• Nov: 102.2

• Dec: 102.3

• Jan: 102.1

Industrial production peaked one month before recession started.

Look at Ip’s chart for Industrial Production and note how negative (and wrong) that it is. September Industrial Production was 101.9.

The average of the four months at the start of recession is (101.6 + 102.2 + 102.3 + 102.1) = 102.1 That’s up from 101.9 not hugely down as Ip shows.

Now let’s take a look at things from the perspective of the Sahm indicator.

Industrial Production Using Sahm Trigger

• Jan: 102.1

• Feb: 101.8

• Mar: 101.4

• Apr: 100.7 Sahm Trigger (was this remotely useful?)

“Real-Time” Nonsense

Sahm labels “her” indicator as “real-time”.

With lags as long as 7 month and never leading in the history of the data to 1948, there is nothing “real-time” about it.

Ip enhances the mistakes by taking a lagging indicator then applying those conditions to other indicators with varying lags.

QCEW and Business Employment Dynamics (BED)

Greg Ip also ignores or is unaware of enormous discrepancies between the monthly nonfarm payroll reports, also called Current Employment Statistics (CES) and the QCEW reports.

BED is a large subset of the Quarterly Census of Employment and Wages QCEW which covers 11.6 million businesses

The nonfarm payroll reports are based off surveys of under 700,000 businesses. QCEW is based off 11.6 million businesses.

Expect the BLS to Revise Job Growth Down by 730,000 in 2023

On July 26, 2024, I commented Expect the BLS to Revise Job Growth Down by 730,000 in 2023, More This Year

Bloomberg’s chief economist, Anna Wong, arrived at a -730,000 overstatement in nonfarm payrolls. Using the same data, I calculated (in advance of her number), -779,000.

By her estimate, the BLS jobs overstated nonfarm payrolls by 81,111 jobs every month for 9 months. Click on link for more details.

Yet, here we are, putting faith in nonfarm payroll numbers that are not only lagging, but outright nonsense.

My July 8 Recession Call

July 8: Weak Data Says a Recession Has Already Started, Let’s Now Discuss When

I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.

Since then ….

ADP Change in Employment

Data from ADP, chart by Mish

Unemployment Rate

August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions

August 2, 2024: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered

A recession indicator based off rising unemployment triggered in July. Claudia Sahm, a former Fed economist, takes credit for an indicator she did not invent. Let’s discuss.

Key Points

• Due to the lagging nature of the Sahm rule, recession is highly likely to already be underway when it triggers.

• Applying her rules to other indicators is a serious mistake.

• I like a trigger of 0.4, halfway between the original McKelvey idea and Sahm’s revised rule.

• Click on above link for details.

Also, please take a look at my July 31 post Small Business Employment Growth Is Now Negative (and What It Means)

ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49!

Payroll trends are negative in all but very large corporations (Given Intel’s 15,000 Mass Layoff and tech woes in general, how long will that last?)

Recession is underway.

This year, an increasing number of the world’s top candy companies have been sounding the alarm about skyrocketing cocoa prices, leading them to hike candy bar prices. The real culprit here isn’t as much corporate greed but rather adverse weather conditions, such as drought in West Africa, which has decimated cocoa harvests and caused worldwide supply concerns. No matter how often politicians tell their constituents that voting for them will bring down overall inflation, we find that somewhat to believe, especially for food, as it will remain sticky in the years ahead.

Cadbury Australia is the latest confectionery company to warn about rising candy bar prices due to high cocoa prices. It said Freddo Frogs and Caramello Koalas prices will now double. 

“Due to the record global price of cocoa and increased input costs, we have adjusted the RRP from $1 to $2, the first price change in over a decade,” Cadbury wrote in an Instagram statement.

Cadbury’s price hikes come as several other confectionery companies have done the same, including Nestlé Confectionery UK & Ireland, which said, “Demand appears to be resilient at the moment, but as prices go up, we would expect to see dampening demand.” 

Just last week, the CEO of iconic US chocolate maker Hershey made a stark observation about just how hard-hit soaring prices have been for the middle class, admitting that “consumers are pulling back on discretionary spending.” 

Record high cocoa prices have hit Hershey’s margins and forced the company to raise their prices further — even as consumers cut down on brand name purchases at the supermarket. Hershey said that higher commodity costs eroded profitability during that period, offsetting productivity improvements and higher prices.

Here are the latest reports on the cocoa market:

• Cocoa Prices Rise As US Stockpiles In Exchange-Monitored Warehouses Hit Four-Year Low

• Cocoa Prices Slide To Five-Month Low On Demand Destruction Fears From Hershey

• Americans Can’t Even Afford Chocolate: Hershey Sales Crater, Guidance Melts

• Swiss Chocolatier Warns High Cocoa Prices Resulting In Global Slowdown In Chocolate Market

• KitKat-Maker Warns ‘Cocoaflation’ Will Send Chocolate Bar Prices Higher For Consumers

Meanwhile, Cocoa futures in New York have been oscillating in a symmetrical triangle pattern between $12k a ton and $7k a ton since early April.

The coiling in prices means a big move is nearing – yet direction has not been determined. 

Authored by Martin Young via CoinTelegraph.com,

Donald Trump Jr. has announced plans to launch a new decentralized finance (DeFi) cryptocurrency platform to address inequality in banking access. However, the platform is still in the early stages and will take some time to become a reality.

During a Q&A session on subscription-based platform Locals on Aug. 8, Donald Trump Jr, the eldest son of presidential candidate and former President Donald Trump, said he wasn’t launching a memecoin but working on a crypto platform to take on the banks.

“What we’re talking about is a larger type of platform,” that’s very different and not a memecoin, he said.

However, he added that it would be a “long time before we can do anything,” not giving anything away on a time frame.

Trump Jr. didn’t provide much more detail on the platform but emphasized that it would target the banking system:

“What we want to do is take on a lot of the banking world. I think there has been a lot of inequality in that only certain people can get financing […] so this notion of decentralized finance is obviously very appealing to guys like me who have been debanked.”

Trump Jr. discussing the new crypto platform. Source: Steven Steele

Rumors around a new crypto offering began circling after Trump mentioned DeFi in an Aug. 7 X post, with many believing it may be related to a new memecoin launch. 

“We’re about to shake up the crypto world with something HUGE. Decentralized finance is the future — don’t get left behind,” he said.

His brother, Eric Trump, said something similar on X on the same day:

“I have truly fallen in love with crypto/DeFi. Stay tuned for a big announcement.”

At the Q&A, he also addressed rumors regarding the Restore the Republic (RTR) memecoin, which had surged and crashed amid false rumors of association with the Trump family. 

Eric Trump also recently denied any connection with the memecoin, calling the rumors “absolutely false” in an Aug. X post, which sent the RTR token crashing over 70%.

Trump Jr. made a similar warning in an X post on Aug. 8, saying: “I love how much the crypto community is embracing Trump. It’s absolutely incredible, but beware of fake tokens claiming to be part of the Trump project.”

“The only official project will be announced directly by us, and it will be fair for everyone.”

Source: Donald Trump Jr.

By Maartje Wijffelaars, Senior economist at Rabobank

US jobless claims were down by 17,000 to 233,000 in the week that ended 3 August. The drop was largest in almost a year’s time and lower than expectations (240,000), although the latter is anything but unique. Continuing claims edged up and reached their highest level since end November 2021, though, underscoring that unemployment is still trending upwards and that the labour market continues to cool. Yet, the figures sent both stocks and yields higher as it lowered both – in our opinion overdone – fears of a hard landing and rate cut expectations.

The S&P 500 ended the day 2.3% higher, while 2-year and 10-year treasuries were up 8 and 5 basis points, respectively to 4.04 and 3.99. Note, though, that while traders have cut back on their expectations of aggressive Fed cuts, the OIS curve still prices for a 37bp cut in September and 100 basis points through the end of this year. The US job figures also helped European stock markets pare losses, with the Euro Stoxx 600 going up from -1.2% to -0.4% right after publication and ending the day flat.

Given it’s our weekly wrap-up, let’s take a step back to evaluate past week’s developments. It has been marked by significant stock market drops across the globe, the largest one day move in the VIX ‘fear’ index in history, aggressive rate cut bets in the US, and strong FX movements. The stark appreciation of the yen against the dollar was arguably one of the most sensational. Macro triggers ranged from an only partially priced-in rate hike in Japan combined with a hawkish comment, to weaker than expected activity and employment data in the US, several disappointing revenue reports from the US techs, and the unwinding of yen carry trades as a result.

Opposite movements took place in the days after, as some sense returned and the acknowledgement came that overselling had taken place. Central bankers in the US tried to convince markets it would not react to the turbulence and that one weak data point doesn’t make for a crisis. The BoJ instead told markets that it actually would take turbulence into account, hinting that it wouldn’t hike fast. Furthermore, several earning reports coming in actually weren’t that bad. Despite pull back against the initial movements, the US dollar and stock markets around the globe are still down from last week’s high, and the Japanese yen up from last week and even more so compared to early July.  

All that being said, it were not merely macro developments that caused past week’s turmoil. Quite the opposite, in fact, argues our senior cross-asset strategist Christian Lawrence. Equity positioning was heavily stretched with multi-year low volatility driving asset managers allocating by vol targets into equities. In fact, an S&P500 vol control fund with a 15% target was max long equities, so any spike in volatility was likely to trigger equity selling. The rise in systematic or ‘rules-based’ trading means that the market is prone to one way traffic at times.

The initial trigger behind the spike in volatility was the Bank of Japan’s announcement of an interest rate hike and asset purchase slowdown. Heading into that decision, the market was the most short JPY since 2007 as the currency was used to fund carry trades. In the FX world, that looked like borrowing JPY and buying a high yielder such as the Mexican peso. But US equity investors also borrowed in JPY to buy equities. The rise in JPY as a result of the BoJ announcement triggered a mass unwind of those carry trades and that triggered equity selling that also pushed the index through key technical levels that forced momentum strategies to start selling as well.

As volatility rose, vol targetters had to sell more and a snowball effect took hold with discretionary managers also jumping on the move. Credit markets moved but remained orderly, pointing to the structural factors exacerbating the equity moves. That said, rates were not immune and buying of US Treasuries surged. The softer than expected labor report on Friday was viewed as a major driver of that move with the rise in unemployment to 4.3% triggering the Sahm rule and implying a recession could be coming. Economic data are slowing, but they are not suggesting an economic collapse that would justify the price action, which, in its extreme briefly resulted in the market implying 150bp of cuts by year-end across just three meetings.

Rates volatility was significant with the 2yr UST trading a 43bp range. Price action soon moderated however, as vol sellers emerged to push the VIX down from its extremes and as that happened, the changing volatility landscape helped break the snowball. This episode points to how the roles of market structure and positioning extremes can cause dramatic moves over short periods that cannot be justified by underlying fundamentals.

In other news, energy prices have moved upwards this week. Oil recovered from a 7-month low on Monday to USD 79 per barrel, as tensions are building in the Middle East, production has been cut in Libya and Ukraine is performing attacks on Russian soil. Israel, and the world for that matter, is preparing for an attack by Iran and its axis of resistance as retaliation for Israel’s assassination of the Hamas and Hezbollah leaders. Iran has told France it is looking for diplomatic de-escalation, but the situation remains very tense, to say the least.

Weak demand is still keeping a lid on prices and according to our energy analyst Joe DeLaura, it would take actual disruptions to oil flowing through the Persian Gulf – as a result of attacks on oil facilities in the region by Iran and its proxies and/ or blockades to transport – to send oil prices significantly upwards. But if it were to happen, we should embrace ourselves for spiralling oil prices far over 100 dollars per barrel.

Meanwhile, gas prices have increased and are at their highest level so far this year. Strong cooling demand in Asia and Southern Europe, as well as Ukrainian fighting near an important gas intake point in Russia –actual flows have hardly been impacted yet – and upcoming maintenance in Norway, a key supplier for Europe, have send prices upwards. Dutch TTF one-month ahead currently trades at EUR 40 per MWh, compared to February’s low of EUR 23. It is fair to say, however, that the price is far below last year’s highs and pretty much comparable with that a year ago. Prices are likely to increase further towards the end of the year and into next. On top of the usual seasonality in prices in Autumn and Winter, a transit deal between Russia and Ukraine is coming to end this year and unlikely to be renewed. A deal between the EU and Azerbaijan to make up for that loss is being negotiated, but hasn’t been concluded yet and there are no guarantees it will be. 

Rising energy prices from recent lows are not a major cause of concern yet, and a crisis as witnessed between 2021 and 2023 isn’t imminent. But inflationary risks stemming from the energy complex are certainly not behind us either, with the situation in the Middle East continuing to pose the largest fat tail risk.

The potential of generative AI to transform companies, industries, and societies has been widely touted around the clock by Wall Street analysts and MSM, resulting in what could be a trillion-dollar spending spree in capital investments by companies in the coming years. These investments will cover data centers, chips, AI infrastructure, and the power grid. However, given this context, as AI infrastructure is being built, one of America’s largest networking equipment firms building AI infrastructure could be on the verge of thousands of layoffs. This news doesn’t bode well for the AI bubble. 

Reuters, citing ‘people familiar with the matter,’ reports that Cisco plans to cut thousands of jobs in a second round of layoffs. These cuts could be similar in scale to the 4,000 layoffs in February and may be announced as early as next Wednesday.

Cisco is the largest maker of routers and switches that direct internet traffic. The company announced plans to deliver AI infrastructure solutions to data centers with Nvidia earlier this year. Sluggish demand and supply-chain constraints could indicate an emerging slowdown in building an AI compute-based environment. 

The latest data from Bloomberg shows Cisco employed around 84,900 people as of July 2023. That number does not include the February layoffs that Reuters first reported. At the time, we penned this note: “Cisco To Fire “Thousands, Adding To Firehose Of Tech Layoffs Since Beginning Of 2024.” 

The bear market in Nvidia has some questioning valuations and whether the AI bubble has reached a near-term peak.

In early July, Goldman’s Allison Nathan said despite the rising spending trends in “data centers, chips, other AI infrastructure, and the power grid” by companies, this has yet to translate into “efficiency gains among developers.” 

The developing theme is that investor enthusiasm about the potential financial returns from AI has shifted to skepticism. In short, the trillions in market cap gained by the Big 7 – the biggest bubble in history – has yet to produce adequate returns. 

Potential Cisco layoffs, which would be the second round of the year, are an ominous sign for the stability of the AI bubble.

Dear Prime Minister,

Your condemnation of everyone as Far Right suggests a misunderstanding of the phrase.

Left wing means Big Government or Constructive Rationalism, i.e. a constructed or made-up world.

Right Wing is Small Government or Critical Rationalism, i.e. a society and economy that adjusts to reality rather than other way around.

Left Wing is control by government, living your life for you, and right wing is freedom.

Left wing is effectively a denial of reality – a lie if you will – whereas right wing is the truth.

This is why the left cannot tell the truth to the public because to do so would undermine its whole belief system. It is only through the truth that problems can be solved, and the economy and society improve, clearing to that truth in a path of prosperity. By contrast, by clearing of truth, left wing government follows a road to serfdom.

As a lawyer, you will know the difference between The Rule of Law and legislation. The Rule of Law is that derived of common consent, which is very different from legislation, which is imposed, and therefore a corruption of the system. The Rule of Law is the optimum place for the economy and society to be because it is where the system is effectively in equilibrium with reality. Any government beyond that, or less than that, is always sub optimal, at the expense of society.

There is a real cost to everything, and therefore anything that doesn’t create the utility to pay for itself is at the expense of capital. This means there is a real price for everything, although that price is dynamic and will depend on all other prices.

All government does, at least beyond implementing The Rule of Law, is “impose prices”, whether that is through fiscal, monetary, or regulatory policy. Any government beyond the Rule of Law is nothing but an imposed price rather than a taken one, and therefore a corruption of the system, which, given how large government has become, is being done on an industrial scale. Given just how big government has now become, not just through fiscal policy but regulatory policy as well, far from the idea of helping people, you have impoverished society and effectively stolen people’s lives from them, making them dependents of you. Why? I can only hope it’s because of a lack of understanding on your behalf rather than malice. 

The Rule of Law, that comes by common consent, is effectively a taken price – the system optimising law to the most productive economy and society etc, which is why it defines the optimum level of government. Legislation, on the other hand, is imposed prices, and therefore a corruption of reality and a suboptimal economy and society.

By imposing prices, the government is discriminating, saying this is where it values something rather than where reality values it. Left wing is, by definition, discriminatory, and as applied to race, is racist. A free market, on the other hand, is colour blind. It is only interested in the true value of things, and indeed the truth. Right wing clears to the truth and wealth creation whereas left wing clears of the truth and wealth to its constructed reality. 

Fascism is a term coined by Mussolini to mean “everything in the state, nothing outside the state”. It is clearly left wing as was always understood at the time. National Socialism was competing with Communism for the extreme left-wing vote. Yes, people were allowed to own capital, but as the government directed how that capital was to be used, it was left wing. It was only Stalin trying to separate the two ideologies that called it right wing, a tactic that has grown ever since as left-wing parties try to distance themselves from their own failures. The main difference between the two parties was Communism was global whereas Nazis was a national form of socialism, hence Stalin’s labelling of it as right wing associated that national aspect to also relate to right wing. You cannot have right wing dictatorships as it is a contradiction in terms.

Because constructivism is about imposing prices rather than taking them, it is a corruption of reality, effectively a lie at the expense of lost capital and declining economies or growth rates etc. This means that the left wing’s entire case is based on lies. They cannot win a fair argument because their entire ideology is corrupt. This means they must change definitions of words and lie to basically win a debate. This is why words such as right wing and fascism have been corrupted.

Because left wing or Constructivism is a corruption of the system and will always fail, just as it changes the meaning of words, it must also change history, either by redefining it, or by saying it wasn’t socialism that was the problem but the way it was implemented.

 It is also why you, and the left wing generally, cannot admit the truth that the riots in the UK are due to the public concern about immigration and declining living standards, as to do so, would see your entire ideological universe collapse.

To be honest, I don’t blame you. The real problem lies with the Conservatives who have forgotten what Conservatism is about and have therefore been unable to resist the move leftwards and the corruption of reality. They offer soundbites of low taxes and reduced regulations, but clearly don’t understand why it is so important. Until they start embracing the right wing and the freedom and prosperity that the correct allocation of capital brings, then they are just competing with you on the left wing for who will do most damage to society. 

Whilst you are taking ever more power trying to hold the edifice of big government together, which I’m sure you will succeed with in the short term, you must remember that as every bit of control you take is a misallocation of capital, not creating the utility to pay for itself, it is also a step closer to its eventual demise. 

With the Internet now offering competition of information, such that the system can clear to the truth rather than of it to the government created narrative, hopefully the time of big government, and the corruption that it is, will soon come to an end, before you do too much more damage.

Yours faithfully,

One of the 80% of the public that didn’t vote for you…

Authored by Katabella Roberts via The Epoch Times (emphasis ours),

The Minnesota Supreme Court unanimously upheld a 2023 state law returning voting rights to Minnesotans with felony convictions immediately after their release from prison.

In its Aug. 7 ruling, the state’s highest court did not comment on the merits of the law but rejected a challenge from the nonpartisan organization Minnesota Voters Alliance (MVA), alongside four citizen plaintiffs.

The court agreed with a previous lower court decision that found the group and individuals lacked legal standing to challenge the measure and had failed to prove that the Legislature overstepped its authority when it voted to extend voting rights to individuals who are out of jail but still on probation for a felony.

The legislation, House File 28 or the “Restore the Vote” bill, was signed into law by Minnesota Gov. Tim Walz—whom Vice President Kamala Harris announced this week as her running mate—in March last year.

It returned the right to vote for convicted felons who have completed their term of incarceration, including those who remain on parole or probation, and required the Department of Corrections or judiciary system officials to inform the convicted felons in writing that they were able to vote upon their release.

The measure maintained that incarcerated individuals would not be able to vote.

At the time Walz signed the bill into law, he said it would likely apply to more than 55,000 convicted felons in the state who have completed their prison terms, thus allowing them to vote immediately.

The measure marked the largest expansion of voting rights in Minnesota in a half-century, as previously convicted felons had to wait until the completion of their probation period to be able to vote again.

While the bill was set to go into effect on July 1, 2023, it was quickly challenged by the MVA, who argued in a lawsuit filed in Anoka County District Court that the law violates the state Constitution.

The group pointed to Article VII, Section 1 of the Minnesota Constitution, which requires that a felon may be “entitled or permitted to vote at any election in this state” only after they have been “restored to civil rights.”

They argued the law was unconstitutional because it returns a felon’s right to vote before their civil rights are returned, or before the felon has been “relieved of all limitations and burdens, such as parole and restitution, placed on them by the court-imposed sentence.”

‘Constitutional Questions Unanswered’

However, lower court Anoka County Judge Thomas Lehmann overruled the MVA’s challenge, citing a lack of standing by the taxpayer as a valid standing “requires a challenge to an illegal expenditure or waste of tax money.”

The lower court determined that the taxpayers “failed to satisfy this requirement” because they “did not challenge a specific disbursement of public funds” but instead, used the Legislature’s appropriations as a “mere jumping-off point” to “challenge something that has nothing to do with money: namely, the eligibility of some citizens to vote.”

MVA then appealed to Minnesota’s Supreme Court, which agreed with the lower court and concluded that the taxpayers lacked standing.

“We instead hold that when standing would not otherwise exist to challenge a substantive law, a taxpayer cannot manufacture standing by pointing to expenditures that are incidental to implementing the law,” the court wrote.

The ruling from the state’s Supreme Court comes as early voting for next week’s primary election is already underway. Early voting for the Nov. 5 general election will start on Sept. 20.

In a response to the Minnesota Supreme Court’s ruling, the MVA said it was “disappointed that this decision makes it more difficult for Minnesotans to hold their government accountable and leaves the important constitutional questions in this case unanswered.”

“We are deeply frustrated that the Minnesota Supreme Court chose to limit our clients’ rights as taxpayers to challenge their government’s unlawful actions in the courts,” said Doug Seaton, president of UMLC, the organization that challenged the law on behalf of the MVA. “This decision sidesteps the necessary constitutional scrutiny and leaves Minnesotans without a clear resolution on the legality of significant changes to our voting laws.”

The MVA vowed to “continue to seek resolution to government or legislative actions that negatively impact Minnesota’s election system.”

Chase Smith and The Associated Press contributed to this report.

Authored by Lance Roberts via RealInvestmentAdvice.com,

A Universal Basic Income (UBI) sounds great in theory. According to a previous study by the Roosevelt Institute, it could permanently increase the U.S. economy by trillions of dollars. While such socialistic policies sound great in theory, history, and data, they aren’t the economic saviors they are touted to be.

What Is A Universal Basic Income (UBI)

To understand why the theory of universal basic income (UBI) is heavily flawed, we need to understand what UBI is.

“Basic income, also called universal basic income (UBI), is a public governmental program for a periodic payment delivered to all citizens of a given population without a means test or work requirement. Basic income can be implemented nationally, regionally, or locally, and is an unconditional income sufficient to meet a person’s basic needs (i.e., at or above the poverty line).“

The idea of guaranteed income is not a new thing. According to Wikipedia:

“The concept of a state-run basic income dates back to the early 16th century when Sir Thomas More’s “Utopia” depicted a society where every person receives a guaranteed income. 

In the late 18th century, English radical Thomas Spence, and American revolutionary Thomas Paine, declared their support for a welfare system that guaranteed an assured basic income. Nineteenth-century debate on basic income was limited, but during the early part of the 20th century, a basic income called a “state bonus” was widely discussed. 

In 1946, the United Kingdom implemented unconditional family allowances for every family’s second and subsequent children. In the 1960s and 1970s, the United States and Canada conducted several experiments with negative income taxation, a related welfare system. From the 1980s and onward, the debate in Europe took off more broadly, and since then, it has expanded to many countries around the world. “ 

While the concept of a UBI sounds good in theory, do they work in reality?

Will UBI Won’t Increase Economic Growth

“More money in people’s pockets will lead to stronger economic growth.” – J.M. Keynes

The underlying sentiment behind a universal basic income is that if the government provides a base income, it will lead to more robust economic growth. In 2020 and again in 2021, the U.S. Government implemented a limited form of UBI by sending $1400 checks to households. The result was unsurprising. While those checks did lead to strong economic growth, they also created a surge in inflation, essentially wiping out the stimulus’s benefit.

As shown, the stimulus surge led to an increase in economic activity. However, the impact on the quality of life (due to the rise of inflation) was minimal, if not negative. Those stimulus payments were not true UBIs, as each payment only occurred once. A true UBI is a monthly income provided.

While the Roosevelt Institute suggested that UBI was an economic savior, the other point they missed was that the UBI would only provide benefits for a single year.

Let’s run a hypothetical example using GDP from 2007 to the present. We will assume that In 2008, in response to the “Financial Crisis,” Congress passed a bill providing $1000/month ($12,000 annually) to 190 million families in the U.S. 

The chart below shows the economy’s annual GDP growth trend, assuming the entire UBI program contributes to economic growth. For those supporting programs like UBI, it certainly appears as if GDP is permanently elevated to a higher level. 

However, such is a bit deceiving. When we examine the annual rate of change in economic growth, which is how we measure GDP for economic purposes, a different picture emerges. In 2008, when the initial $12,000 arrived at households, GDP spiked, printing a 17% growth rate versus the actual 1.81% rate. Such would be expected as consumers spend the additional income. (The spike in GDP In 2021 was due to the stimulus payments during the Pandemic.)

However, beginning in 2009, the benefit disappears. That is because following the injection of UBI into the system, the economy normalizes to a new level after the first year. Also, notice that GDP grows slightly slower as the dollar changes to GDP at higher levels print a lower growth rate. Furthermore, the increase in demand from providing a UBI will be offset by the rise in inflation, just as we saw in 2021.

A good example was the Biden Administration’s increase in childcare benefits. While households received more benefits to pay for childcare, the cost of childcare rose faster than the benefit, making childcare even more unaffordable.

Economic basics are nearly always forgotten in a rush to help those in need. If incomes are increased by $1000/month, prices of goods and services will adjust to the increased demand. The economy will quickly absorb the increased incomes, erasing the proposed UBI benefit.

UBI’s Dark Side

Of course, the money to provide the $12,000 UBI benefit had to come from somewhere.

According to the Center On Budget & Policy Priorities, in 2023, roughly 90% of every tax dollar went to non-productive spending. 

“In fiscal year 2023, the federal government spent $6.1 trillion, amounting to 22.7 percent of the nation’s gross domestic product (GDP). About nine-tenths of the total went toward federal programs; the remainder went toward interest payments on the federal debt. Of that $6.1 trillion, only $4.4 trillion was financed by federal revenues. The remaining amount was financed by borrowing.”

Think about that for a minute. In 2023, 90% of all expenditures went to social welfare, non-productive spending, and interest on the debt. Those payments required $6.1 trillion, roughly 138% more than the tax dollars collected.

Given the decline in economic activity this year, those numbers will likely become markedly worse. Given this data, it would also mean that 100% of the UBI payments would have come solely from debt.

The table below shows the increase in total Federal Debt adjusting for the annual UBI payment. 

The chart below takes our hypothetical example and compares the impact of the additional debt on the Federal deficit from the implementation of UBI.

While the “theoretical models” assume that UBI will create enough economic growth and prosperity to “offset” the increase in debt, 40-years of history suggest otherwise.

However, this is all theory about the impact of UBI on economic prosperity. A recent 3-year study provides the actual results.

The Results

“Five researchers published a paper that tracked 1,000 people in Illinois and Texas over three years who were given $1,000 monthly gifts from a nonprofit that funded the study. The average household income for the study’s participants was about $29,000 in 2019, so the monthly payments amounted to about a 40 percent increase in their income.”

Surely, those who received $1000/month for three years were much better off in the end? As noted by Reason:

“Relative to a control group of 2,000 people who received just $50 per month, the participants in the UBI group were less productive and no more likely to pursue better jobs or start businesses, the researchers found. They also reported “no significant effects on investments in human capital” due to the monthly payments.

Participants receiving the $1,000 monthly payments saw their income fall by about $1,500 per year (excluding the UBI payments), due to a two percentage point decrease in labor market participation and the fact that participants worked about 1.3 hours less per week than the members of the control group.”

If those people are working less, the question to ask is how they spend that extra time.

“Participants in the study generally did not use the extra time to seek new or better jobs—even though younger participants were slightly more likely to pursue additional education. There was no clear indication that the participants in the study were more likely to take the risk of starting a new business, although Vivalt points out that there was a significant uptick in “precursors” to entrepreneurialism. Instead, the largest increases were in categories that the researchers termed social and solo leisure activities.”

The results of the 3-year experiment are unsurprising, as basic economics and human nature would already surmise.

Conclusion

In its essential framework, a universal basic income sounds excellent. It would ensure that everyone has fundamental needs covered. Then, they can go out and produce and not worry about covering critical bills. Unfortunately, the additional income is quickly absorbed into the economy as prices rise (inflation) to compensate for the extra spending. After the first year, the UBI would have to be increased or no longer have any benefit. 

Therein lies the trap with all socialistic programs.

While UBI, along with free healthcare, education, childcare, etc., sounds great, they are NOT productive investments with a higher return than the carrying cost of the debt. History suggests these welfare supports have a negative multiplier effect on the economy.

Most telling is the inability of the current economists, who maintain our monetary and fiscal policies, to realize the problem of trying to “cure a debt problem with more debt.”

The Keynesian view that “more money in people’s pockets” will drive up consumer spending and boost GDP has been wrong. 

It hasn’t happened in 40 years.

We fear these socialistic programs, which promise “free everything” with no consequences, instead deliver inflation, generate further income inequality, and ultimately increase social instability and populism. Such has resulted in every other country running such programs with unbridled debts and deficits.

It is also showing up in the United States as well.

While UBI sounds excellent at the conversational level, so does “communism” and “socialism.” In practice, the outcomes have been vastly different than the theory.

As Dr. Woody Brock aptly argues:

“It is truly ‘American Gridlock’ as the real crisis lies between the choices of ‘austerity’ and continued government ‘largesse.’ One choice leads to long-term economic prosperity for all; the other doesn’t.”

Take your pick.

China’s consumer prices rose faster than expected in July, driven mostly by a surge in food/pork prices, even as core inflation continued to sink, raising concerns over persistent deflation in the world’s second-largest economy.

The country’s CPI rose 0.5% YoY In July year on year, the National Bureau of Statistics said on Friday, beating the median forecast of a 0.3%. The rise was the biggest since February, when prices grew 0.7%, and outpaced the 0.2% rise in June. Food price inflation rose across the board in July due to a decrease in supply from adverse weather. Meanwhile, both non-food price inflation and core inflation edged down in July, indicating continued weakness of domestic demand.

Meanwhile, deflation persisted in producer prices, a gauge reflecting goods as they leave factory gates as well as costs of materials and commodities, which were down 0.8% in July, the same as the previous month, if fractionally stronger than the -0.9% estimate. PPI inflation in upstream sectors rose modestly while that in downstream sectors fell slightly. In month-over-month terms, PPI inflation edged down to +1.8% in July vs. +1.9% in June. PPI inflation in producer goods ticked up to -0.7% yoy in July from -0.8% yoy in June, and PPI inflation in consumer goods edged down to -1.0% yoy in July (vs. -0.8% yoy in June).

Looking ahead, Goldman said it expects PPI deflation to lessen gradually, and CPI inflation to remain relatively low in the coming months.

Some more details from the report, courtesy of Goldman:

• In year-over-year terms, food prices were flat in July compared with a year ago (vs. -2.1% yoy in June). The prices of major food items rose in July due to adverse weather, especially for fresh vegetables/fruits. Among major food items, pork prices a major component of China’s consumer goods basket, leapt 20% YoY in July, the most since late 2022, and up from 18.1% in June. Prices have been highly volatile since outbreaks of African swine fever from 2018 to 2021 led to mass culling of herds. Inflation in fresh vegetable prices rose to +3.3% yoy in July from -7.3% yoy in June, and inflation in fresh fruit prices rose to -4.2% yoy in July (vs. -8.7% in June).

• Non-food CPI inflation edged down to +0.7% yoy in July from +0.8% yoy in June. The moderation is broad-based across various categories. After excluding food and energy prices, core CPI inflation softened to +0.4% yoy in July (vs. +0.6% in June), indicating still weak domestic demand. Although NBS mentioned that tourism-related prices, such as flight ticket fares and hotels, rose sequentially, the year-over-year growth moderated from June to July. Fuel costs increased by +5.1% yoy in July (vs. +5.6% yoy in June). Services inflation edged down to +0.6% yoy in July (vs. +0.7% in June; Exhibit 2).

Surging food prices aside (the result of recent flooding across China), consumer price growth has remained very weak in China over the past year, with frequent negative reading casting doubts over the strength of domestic demand in the midst of a three-year property slow-motion crash. Intense competition across Chinese industries, especially the automotive sector, have added to downward pressure on prices. Beijing has intensified its focus this year on manufacturing after a post-pandemic consumer rebound failed to materialise last year.

Lynn Song, chief China economist for ING, said flat food prices, which had been mired in deflation for the past year, were a “big part of the increase” in overall CPI. But he pointed to drags on prices in other areas, including transport facilities due to cheaper vehicle prices, communications due to falling smartphone prices, and declining rents.

“We expect price weakness to remain in the first two categories, while we are in wait-and-see mode on the rent category as policy support for the real estate market continues to roll out,” Song said.

Meanwhile, inflation in items that actually serve as assets to China’s shrinking middle class, refuses to take hold: new home prices in May fell by the most in almost a decade, adding to concerns over the property sector. Authorities in the same month introduced very modest measures to encourage state-owned enterprises to buy unused housing, in a bid to support the market, yet the token amount of the support was largely ignored by the market.

Chinese authorities also unveiled unexpected cuts to lending rates last month after widespread calls for more economic stimulus. These have yet to achieve anything.