We covered a lot of issues including why domestic freedom of movement has more in common with international migration than most people think, why the arguments I advance in Free to Move do not rely on any distinctively libertarian premises, and how the framework for addressing potential downsides of migration that I outline in the book might apply to the coronavirus pandemic.
I am grateful to Jack for this opportunity, and for his thoughtful questions. Part II of the interview will be posted tomorrow.
In the meantime, I am pleased to announce that the audio version of the book is now available for pre-ordering (delivery by June 23). Many readers have asked about this, and Oxford University Press has responded to popular demand by making the audio version available faster than I previously expected. As with the e-book and hard copy editions, 50% of any royalties generated by the audio version will be donated to to charities supporting refugees.
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When the United States and China called a truce in their trade war late last year, arguably the most important part of the deal was China’s promise to increase imports of American goods by $200 billion by the end of 2021.
Don’t get me wrong: There were other important details too. The United States agreed to forgo another planned tariff increase that would have hiked prices for many consumer goods, and both sides agreed to a framework for resolving long-standing disagreements over intellectual property. But for President Donald Trump, who has complained for years about America’s trade deficit with China, the promise that China would import more American goods was clearly the key element of the bargain—as evidenced by the fact that he keeps talking about it.
Through the first four months of 2020, China has imported only about 45 percent of what it would have had to buy to be on pace to meet the deal’s goals, according to an analysis of trade data from both countries by the Peterson Institute for International Economics (PIIE). The so-called “phase one” deal between the two countries broke down the overall $200 billion promise into smaller, specific targets for agricultural goods, energy, and manufacturing outputs. So far, China does not appear to be close to hitting any of those goals:
Chad Bown, a senior fellow at PIIE, notes that the deal only stipulates that China must hit the year-end targets this year and next year. Still, the prorated totals for the first third of the year serve an illustrative purpose.
The COVID-19 pandemic is a factor. It has disrupted manufacturing and trade on both sides of the Pacific. But the bigger problem seems to be that the Chinese import targets were never all that realistic to start. As The Wall Street Journalnoted shortly after the deal was made public, Trump was effectively asking for “an unprecedented jump in bilateral trade.” To meet its obligations, China would have to hike its purchases of U.S. goods by 60 percent over the 2017 (pre–trade war) baseline.
That part of the agreement was “unrealistic at best” from the start, wrote Brookings Institution scholars Joshua Meltzer and Neena Shenai in February. Perhaps worse, the deal actually handed leverage to China for future negotiations. “Because these purchases are not market-based (if they were, the commitments would have been unnecessary), they actually create stronger U.S. dependencies on China,” Meltzer and Shenai wrote. “Because of its state-led and controlled economy, China could gin up demand to try and meet these commitments, but the spigot could likewise be turned off at any point and for any reason.”
Neither side seems to care much now about the trade deal or the fact that China is unlikely to meet its obligations. This week, the Chinese government asked state-owned companies to stop buying American pork and soybeans in response to the United States threatening retaliation for China’s crackdown on Hong Kong. If that happens, China’s already-low purchases of U.S. agricultural goods are likely to fall further.
Meanwhile, Trump said last month that he has no interest in revisiting the trade agreement. “Somehow, I lost a little flavor for it,” he told reporters on May 15, though he also told Fox Business he was “very disappointed in China” for failing to meet its obligations so far. While Trump’s top economic advisers continue to defend the deal, the president’s limited attention span seems to be focused elsewhere.
It now seems like the trade deal was always more of a political prop than anything else—a way for Trump to tout the supposed success of his trade war as he ran for re-election, while postponing any additional tariff increases until at least 2021. Shortly after the “big, beautiful” deal was signed in January, for example, he told farmers at a rally in Ohio they’d have to “buy bigger tractors” in order to meet the new demand from China.
But farmers, who have already borne the brunt of the Trump administration’s costly trade policies, are likely to get shortchanged again. The Trump administration is reportedly preparing another round of federal bailouts for farmers hurt by the trade war—a far cry from the promise that a deal with China would motivate farmers to buy bigger tractors.
Now that the Republican Party has decided its 2020 campaign strategy will be focused on anti-China hawkery, last year’s limited trade agreement probably matters less than it ever did. The only concrete accomplishment of Trump’s economically destructive trade war is looking like a dud.
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The Longest Expansion In History Is Officially Over: The US Entered Recession In February, NBER Finds Tyler Durden
Mon, 06/08/2020 – 12:24
While it should hardly come as a surprise to anyone who can fog a mirror, The Business Cycle Dating Committee of the National Bureau of Economic Research – the official arbiter of whether America is in recession or not – has issued a statement confirming that February 2020 marks the end of the expansion that began in June 2009 and the beginning of a recession. .
This was the longest period of economic expansion in US history at 128 months…
The Business Cycle Dating Committee of the National Bureau of Economic Research maintains a chronology of the peaks and troughs of U.S. business cycles. The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854. The previous record was held by the business expansion that lasted for 120 months from March 1991 to March 2001.
The committee also determined that a peak in quarterly economic activity occurred in 2019Q4. Note that the monthly peak (February 2020) occurred in a different quarter (2020Q1) than the quarterly peak. The committee determined these peak dates in accord with its long-standing policy of identifying the months and quarters of peak activity separately, without requiring that the monthly peak lie in the same quarter as the quarterly peak. Further comments on the difference between the quarterly and monthly dates are provided below.
A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.
Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide indicators of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.
The Month of the Peak
In determining the date of the monthly peak, the committee considers a number of indicators of employment and production. The committee normally views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment.
This series reached a clear peak in February. The committee recognized that this survey was affected by special circumstances associated with the pandemic of early 2020. In the survey, individuals who are paid but not at work are counted as employed, even though they are not in fact working or producing. Workers on paid furlough, who became more numerous during the pandemic, thus resulted in an overcount of people working in recent months. Accordingly, the committee also considered the employment measure from the Bureau of Labor Statistics household survey, which excludes individuals who are paid but on furlough. This series plateaued from December 2019 through February 2020, and then fell steeply from February to March. Because both series measure employment during the week or pay period containing the 12th of the month, they understate the collapse of employment during the second half of March, as indicated by unprecedented levels of new claims for unemployment insurance. The committee concluded that both employment series were thus consistent with a business cycle peak in February.
The committee believes that the two most reliable comprehensive estimates of aggregate production are the quarterly estimates of real Gross Domestic Product (GDP) and of real Gross Domestic Income (GDI), both produced by the Bureau of Economic Analysis (BEA). These measures estimate production that occurred over an entire quarter and are not available monthly. The most comprehensive monthly measure of aggregate expenditures, which includes roughly 70 percent of real GDP, is monthly real personal consumption expenditures (PCE), published by the BEA. This series reached a clear peak in February 2020. The most comprehensive monthly measure of aggregate real income is real personal income less transfers, from the BEA. The deduction of transfers is necessary because transfers are included in personal income but do not arise from production. This measure also reached a well-defined peak in February 2020.
The Quarter of the Peak
In dating the quarterly peak, the committee relies on real GDP and real GDI as published by the BEA, and on quarterly averages of key monthly indicators. Quarterly real GDP and real GDI peaked in 2019Q4.
The quarterly average of employment as measured by the payroll series rose from 2019Q4 to 2020Q1. However, the committee concluded that the special factor noted above implies that the series should not play a significant role in determining the quarterly peak. The quarterly average as measured by the household survey reached a clear peak in 2019Q4. The committee concluded that like GDP and GDI, the number of people working also reached its quarterly peak in 2019Q4.
The fact that the monthly peak of February occurred in the middle of 2020Q1 while the quarterly peak occurred in 2019Q4 reflects the unusual nature of this recession. The economy contracted so sharply in March (the final month of the quarter) that in 2020Q1, GDP, GDI, and employment were significantly below their levels of 2019Q4.
* * *
All of which makes perfect sense given stocks are at record highs…
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Sizing The Commercial Real Estate Bust Tyler Durden
Mon, 06/08/2020 – 12:05
Submitted by Chris Whalen of The Institutional Risk Analyst
“You pass the Helmsley Palace, the shell of old New York transparently veiling the hideous erection of a real estate baron…”
Jay MacInerney
Bright Lights, Big City (1984)
So how big is the impending commercial real estate bust in the US? Bigger than the residential mortgage bust of the 2000s and also bigger than the commercial real estate wipeout of the 1990s, including the aftermath of the Texas oil boom of the late 1970s and 1980s.
Commercial real estate as a mortgage asset class is half the size of the $11.5 trillion market for residential homes, but the losses this cycle could be far larger per dollar of assets. That’s big. Both markets are fundamentally affected by interest rates above all.
The US has not experienced a really nasty deflation in commercial real estate prices since the 1990s and, before that, the bust in the Texas oil patch in the late-1970s. Abby Livingston told the story of Houston during the oil bust in The Texas Tribune last month (“All of the party was over”: How the last oil bust changed Texas”):
“Real estate soon emerged as the most noteworthy outlet for Texas money. With growth in commerce and in population, it seemed quite logical at the time to invest big in new housing developments, soaring skyscrapers in Dallas and Houston, shopping centers, and vacation condominiums on South Padre Island.”
Last week, the Financial Times reported that Chesapeake Energy Corporation, the pioneer of shale oil created by Aubrey McClendon, is on the brink of bankruptcy. This not only signals the end of the US oil boom, but another surge in real estate speculation in the areas affected. From the New York border southwest along the Appalachian Mountains to Texas and as far west as California, shale exploration and production financed a period of giddy real estate investment that is now suddenly ended.
Equity REITs own more than $2 trillion of physical real estate assets in the U.S. including more than 200,000 properties in all 50 states and the District of Columbia, NAREIT reports. The equity REITs, as the name suggests, are generally funded with equity rather than debt, but individual assets are routinely encumbered with mortgages to increase returns.
The latest Mortgage Bankers Association survey shows that commercial banks continue to hold the largest share (39 percent) of commercial/multifamily mortgages at $1.4 trillion. Agency and GSE portfolios and MBS are the second largest holders of commercial/multifamily mortgages, at $744 billion (20 percent of the total). Life insurance companies hold $561 billion (15 percent), and CMBS, CDO and other ABS issues hold $504 billion (14 percent). The chart below shows the equity REITs and the various classes of commercial mortgage lenders and investors.
Source: NAREIT, MBA, FDIC
This particular bust in commercial property is very different from the 1990s, but in common with that era also includes a large energy component. The difference is that, due to COVID19 and the more recent looting in major cities, the valuation of once solid urban commercial and residential properties held by equity REITs is now very in much question.
The fact of the COVID19 lockdown, the riots and looting following the killing of George Floyd by the Minneapolis Police, and the coincident rise of telecommuting, which keeps people away from the large metros, raises questions about the entire economic structure of cities. So long as social distancing is required or even the preferred option, many of the institutions and structures within the big cities no longer function.
Connor Dougherty and Peter Eavis reported in The New York Times on Friday:
“Faced with plunging sales that have already led to tens of millions of layoffs, companies are trying to renegotiate their office and retail leases — and in some cases refusing to pay — in hopes of lowering their overhead and surviving the worst economic downturn since the Great Depression. This has given rise to fierce negotiations with building owners, who are trying to hold the line on rents for fear that rising vacancies and falling revenues could threaten their own survival.”
And the operative term is survival. Add the Shale oil bust to the already precarious state of the commercial real estate market in major metros and the image becomes truly catastrophic. In 1981, oil peaked at $31.77 per barrel, at the time an unheard-of valuation for black gold. The FDIC tells the tale in their excellent History of the Eighties:
“The bottom hit in 1986. Oil was priced at $12.51, still high compared with 15 years before. But historical context was no help to oil producers who plunged deep into debt buying up rigs amid the frenzy to meet anticipated demand. The economic angel of death for oilmen came in the form of bankers calling in loans.”
The 1980s were a tough time in Texas as politicians and business leaders were forced to liquidate business and their personal possessions to pay debts. Much like the shale oil industry today, the domestic oil industry was forced to adjust to changes in oil prices that made these assets uneconomic. But the wider speculative bubble in commercial real estate reached all around the nation. The FDIC continues:
“When the bust did arrive in the late 1980s and continued into the early 1990s, the banking industry recorded heavy losses, many banks failed, and the bank insurance fund suffered accordingly. Compounding the magnitude of these losses was the fact that many banking organizations active in real estate lending had weakened their underwriting standards on commercial loan contracts during the 1980s.”
Sound familiar?
Source: FDIC
The troubles in the oil patch were only part of the economic disaster of the 1980s and early 1990s. The collapse of the residential mortgage market and the S&L industry put home prices into a deep freeze for much of a decade. But the 1980s were also a very difficult time for commercial real estate and a number of major US cities, which had been abandoned by affluent households fleeing the violence and chaos of the inner cities.
After a catastrophic fiscal crisis in New York during the 1970s, followed by the famous blackout and rampant acts of arson, the cities saw mass abandonment of commercial properties, leaving many inner cities derelict. The famous 1977 New York City blackout and subsequent riots destroyed parts of the city and saw public services cut to the bone.
Whereas the nadir of the riots and burning of 1977 in New York marked a starting point for the rebirth of the city decades later, today New York City stands on the edge of the abyss.
What is similar to the 1990s and before was the role of the Federal Open Market Committee in encouraging the financial excesses in commercial lending as part of a broader policy of asset reflation. In the 1970s and 1980s, banks piled into a new asset class known as real estate is a desperate effort to offset losses on loans to Third World nations.
Then Fed Chairman Paul Volcker refused to allow US banks to write down bad loans to Argentina and other debtor nations until he left office in 1989, but the workout of bad commercial loans continued for years to come. The Fed’s aggressive reflation strategy in the 1980s worked, only too well, causing the banks to inflate a vast bubble in commercial real estate that deflated through the 1990s.
Since 2008, low or zero interest rates have again caused an even bigger bubble in commercial real estate assets, a gold rush that drove net loss rates negative as loan-to-value ratios plummeted. Now with asset prices in a free fall, LTVs are rising and we expect to see net loss rates on commercial exposures solidly in the red this quarter. Get used to it.
Source: FDIC/WGA LLC
The Scope of the Damage
The state of the equity REITs casts a pall over the rest of the $5.2 trillion commercial mortgage segment. Once seen as top commercial credits, these equity REITs now face an enormous change in how businesses and consumers view urban commercial office and multifamily residential assets. As usage falls, so too do valuations and tax revenues for the localities.
Projects that a year ago might have made sense as long-term bets on the future of cities like New York have no economic rationale today. And the loans and mortgage bonds that support these buildings no longer make any financial sense. Ponder all of the commercial buildings in New York and other major metros that depend upon tourism, hospitality and entertainment for their economic life. Without these features, there is no reason to be in these metro areas.
The cardinal rule of landlords is that the most important thing is to be aware of your tenants, their needs and their financial situation. When your tenants just get up and leave, however, defaulting on leases and filing bankruptcy, the economic model for rental buildings and condominiums falls apart.
Part of the difficulty of estimating loss rates for commercial properties is that every property is different, every loan is different, sometimes in very significant ways. Whereas you can generalize about residential assets at the portfolio level, with commercial loans the analysis is asset-by-asset, loan-by-loan.
Commercial real estate brokerage CBRE says hopefully that “The real estate recovery will lag the economic recovery, with multifamily and industrial recovering first, followed by office and retail.” But the reality at the loan levels suggests otherwise.
Consider an example: “WFCM 2013-LC12” or the Wells Fargo Commercial Mortgage Trust, a CMBS issued in 2013 with a combination of hotel and retail use commercial properties. Back in 2017, Fitch Ratings noted that the deal “has exhibited relatively stable performance since issuance” and reaffirmed the ratings. But things change.
“As of the May 2020 remittance period, there are two REO assets (1.3%) and one loan in foreclosure (0.4%). In addition, there are 16 loans (24.9%) that appear on the master servicer’s watchlist, including four loans (2.1%) that are 30 days delinquent. The REO assets, the loan in foreclosure, 10 watchlist loans (11.6%), and three other loans (13.6%) have been identified as KBRA Loans of Concern (K-LOCs). K-LOCs consist of specially serviced and REO assets as well as non-specially serviced loans in default or at heightened risk of default in the near term.”
KBRA continues: “Excluding K-LOCs with losses, the transaction’s weighted average (WA) KBRA Loan-to-Value (KLTV) of 91.6% has increased from 87.7% at last review and decreased from 99.2% at securitization. The KBRA Debt Service Coverage (KDSC) of 1.67x has decreased from 1.76x at last review and 1.69x at securitization.”
So, the good loans, excluding the likely losses and doubtful assets, have an LTV over 90%. The equity in many of the remaining properties may already be gone depending upon the location and utilization levels. Bank owned CRE, by comparison, tend to have initial LTVs closer to 50, but those assets may also have seen significant erosion in the equity and thus an increase in effective LTV.
And by no coincidence, the prices for WFCM 2013-LC12 have suffered since the start of 2020. The most junior D tranche of this CMBS was trading in the mid-90s after the start of the year, but then suffered several downgrades and resultant drops in price.
Today the Ds trade below 70 or about 1,600bp over the curve. If you are lucky enough to hold the bonds, you get the idea. The As are flopping around below par or plus 180bp over the curve after touching 98 in mid-March.
So how big will the commercial real estate bust be in 2020-21 and beyond? In 1991, the FDIC reports, “the proportion of commercial real estate loans that were nonperforming or foreclosed stood at 8.2 percent, and in the following year net charge-offs for commercial real estate loans peaked at 2.1 percent.”
In 1991, the net charge off rate for all $1.6 trillion in bank owned real estate loans was less than 0.5% Multifamily mortgage loans peaked in Q4 of 1991 around 1.5% of net charge offs but remained elevated until 1996.
But this time is different. Based on our informal survey of REIT valuations and individual assets, we think that the world has been turned upside down for many investors. Actual LTVs for urban commercial and luxury residential assets in many metros are well-over 100 and are likely to be restructured, albeit over a period of years. As we noted last week, it’s all about buying time.
We think that net charge offs on commercial loans could rise to 2-3x the peaks of the 1990s, with loss rates at 100% percent or more in some cases, and remain elevated for years for come as the workout process proceeds.
Failing some miraculous economic rebound in the major metros, look for credit costs related to commercial real estate to climb for REITs, CMBS investors, the GSEs, and banks in that order of severity. Figure a 10% loss spread across $5 trillion in AUM over five years?
via ZeroHedge News https://ift.tt/3dJzxBF Tyler Durden
“I Made A Mistake With The Words” – CrossFit CEO Apologizes For “Floyd-19” Tweet After Reebok Cut Ties Tyler Durden
Mon, 06/08/2020 – 11:44
Greg Glassman, the CEO of CrossFit, apologized Sunday for what was deemed by the outrage mob an offensive tweet about George Floyd after Reebok and several gyms cut ties with the exercise company.
CrossFit was immediately dumped by several of its sponsors, including Reebok and several gym affiliates after Glassman on Saturday posted an insensitive tweet about the protests and COVID-19 pandemic.
He tweeted “Floyd-19,” which is a combination of George Floyd’s last name and the virus pandemic: COVID-19 while responding to the Institute for Health Metrics and Evaluation (IHME) Twitter post saying “racism and discrimination are critical public health issues that demand an urgent response, wherever they occur.”
Glassman questioning IHME’s narrative landed him multiple sponsorship deals cut and public backlash. His tweet resulted in Reebok to issue this statement:
“Our partnership with CrossFit HQ comes to an end later this year. Recently, we have been in discussions regarding a new agreement; however, in light of recent events, we have decided to end our partnership with CrossFit HQ.”
A handful of CrossFit gyms, including CrossFit Magnus, Petworth Fitness, Rogue, and NoBul, announced over the weekend that they would end their affiliations with the exercise company.
CrossFit Magnus’ letter to CrossFit about “ending our affiliation”:
After losing Reebok as a major sponsor, Glassman tweeted an apology on Sunday night:
“I, CrossFit HQ, and the CrossFit community will not stand for racism. I made a mistake with the words I chose yesterday. My heart is deeply saddened by the pain it has caused. It was a mistake, not racist but a mistake. Floyd is a hero in the black community and not just a victim. I should have been sensitive to that and wasn’t. I apologize for that.”
Anyone questioning the mainstream narrative is now a racist. Just like what happened at The Philadelphia Inquirer over the weekend when a senior editor stepped down following a headline that read “Buildings Matter, Too,” which detailed the destructive nature of social unrest on the city’s local economy over the last several weeks.
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Often it is stated viewing something in hindsight is like having 20/20 vision. In this case, I am talking about the expectations of a “V-shaped” economic recovery. While such could be the case, it will likely leave everyone disappointed.
What spurred this discussion was a comment via CNBC from Federal Reserve Vice Chairman Richard Clarida:
“Our policies we think will be very important in making sure that the rebound will be as robust as possible. We’re in a period of some very hard and difficult data that we’ve just not seen for the economy in our lifetimes, that’s for sure. But a third-quarter rebound is one possibility. That is personally my baseline forecast.”
The hope for a V-shaped recovery is the basis on which the market has rallied from its March lows. The question we must answer is whether such will be the case.
Fun With Math
You have to be careful when reading headlines, especially when they involve percentages. Most commentaries tend to be very misleading because of the misunderstanding of math.
Let me run some numbers for you to put the expected recovery into perspective.
Currently, if the Atlanta Fed is correct in its current assessment, Q2-GDP will be down more than 50% on an annualized basis. We will also assume the mainstream media analysis is correct of a V-shaped recovery. In this case, we will assume optimistic projections of a 30% recovery in Q3 and an additional 20% in Q4.
The first problem with these assumptions is that there are no previous periods in history to which we can refer to. All of these projections simply dwarf any other period of decline or recovery going back to 1947.
No Vaccine
More importantly, for the economy to return to pre-pandemic levels, there will need to be a vaccine widely available. While there are currently more than 100 different companies working on a vaccine, there are several realities to consider.
Vaccines are very difficult to create. After decades of research, there are still no vaccines for HIV/AIDS, Heptatitis C, Chagas disease, Chikungunya, Dengue, Cytomegalovirus, Hookworm infections, Leishmaniasis, Malaria, Respiratory Syncytial Virus, or Schistosomiasis.
High failure rate. There is more than a substantial chance that all of the 100+ companies working on vaccines for COVID-19 will fail somewhere during the development process. Such is particularly the case if the virus begins to mutate. (Example: Gilead’s Remdesivir 10-day trial failed to reach significance.)
Time – vaccines generally take many years to reach the market as they must go through six developmental steps, including a three-phase clinical development stage. Meaning that by the time an effective vaccine is developed and approved as safe-to-use, the emergency may have blown over. If urgency declines to develop a vaccine as infection rates diminish, research will likely stall and become neglected, as with the SARS vaccine.
Personal Consumption
Without a readily available vaccine, consumer confidence will be slower to recover to pre-pandemic levels. Given that consumption is 70% of GDP, a slow-return of activity will slow economic growth, employment, and wages.
“To review, our forecast assumes that jobs will trough in May. From June going forward, jobs will recover at the same rate and duration as in the aftermath of 2008. Using this assumption, we create the PCE forecast shown below.”
“If the historical relationship between labor and PCE holds up, and consumption continues to be the predominant contributor to GDP, we should not expect GDP to regain prior highs until 2025.”
Recovery To Nowhere
However, the “return to economic normality” faces immense challenges. High rates of unemployment, suppressed wages, and elevated debt levels, makes a “V-shaped” recovery unlikely.
This is where the “math” becomes problematic. A 50% drawdown in Q2, requires a 100% recovery to return to even. In the more optimistic recovery scenario detailed above, two-quarters of record recovery rates still leave the economy running in a deep recession.
Even if the economy achieves high recovery rates, it won’t change the recession. The resulting 2.5% economic deficit will remain one of the deepest in history.
Such does not bode well for employment recovery, wage growth, or corporate earnings.
It’s The Debt
The underlying structure of the economy continues to weaken as non-productive debt erodes growth. As discussed just recently in “Debts, Deficits & The Path To MMT:”
“The relevance of debt growth versus economic growth is all too evident. When debt issuance exploded under the Obama administration and accelerated under President Trump, it has taken an ever-increasing amount of debt to generate $1 of economic growth.”
Such reckless abandon by politicians is simply due to a lack of “experience” with the consequences of debt. In 2008, Margaret Atwood discussed this point in a Wall Street Journal article:
“Without memory, there is no debt. Put another way: Without a story, there is no debt.
A story is a string of actions occurring over time — one damn thing after another, as we glibly say in creative writing classes — and debt happens as a result of actions occurring over time. Therefore, any debt involves a plot line: how you got into debt, what you did, said and thought while you were in there, and then — depending on whether the ending is to be happy or sad — how you got out of debt, or else how you got further and further into it until you became overwhelmed by it, and sank from view.”
Ratcheting Growth Down Again
Today, we have no “story” about the consequences of debt in the U.S. While there is a litany of countries that have had a “debt disaster,” they are simply dismissed. Why? Because “they aren’t the U.S.”
It’s a weak argument.
Before the “Financial Crisis,” the economy had a linear growth trend of real GDP of 3.2%. Following the 2008 recession, the growth rate dropped to the exponential growth trend of roughly 2.2%. Instead of reducing the debt problems, unproductive debt and leverage increased.
The “COVID-19” crisis led to a debt surge to new highs. Such will result in a retardation of economic growth to 1.5% or less. As discussed recently,while the stock market may rise due to massive Fed liquidity, only the 10% of the population owning 88% of the market will benefit. Going forward, the economic bifurcation will deepen to the point where 5% of the population owns virtually all of it.
That is not economic prosperity. It is a distortion of economics.
The CBO’s Nike Swoosh
Interestingly, the first official forecast that incorporates the pandemic from the Congressional Budget Office agrees with our assessment.
“CBO compared its interim, May 2020 projections to the last official forecast made in January 2020. The CBO said the level of nominal GDP in the second quarter of 2020 would be $790 billion (or 14.2%) lower than previously forecast in January 2020. (That number, unfortunately, will only grow larger with time especially if the Atlanta Fed’s 52% GDP drop forecast is accurate). Subsequently, the difference between those projections of nominal GDP narrows from $533 billion. Such is 9.4% lower in the latest projection by the end of 2020 to $181 billion (2.2 percent lower) by 2030.”
While my projections are a bit more optimistic than the CBO, the shape and duration of the recovery are similar and push out full recovery until 2030.
“In real terms, the difference between those projections of real GDP shrinks to $422 billion in 2019 dollars. (That is 7.6% lower in the more recent projection) by the end of 2020 and roughly disappears by 2030. In other words, it will take a decade for the impact of the coronavirus to fade away fully and for the economy to return to its pre-coronavirus normal.”
A Permanent Loss
As noted by Zerohedge, the permanent loss in output in the U.S. was shown by BofA two weeks ago. The bank laid out the pre-covid trend growth and compared it to is base case recovery.
Given the permanent loss in output and rising unproductive debt levels, the recovery will be slower and more protracted than those hoping for a “V-shaped” recovery. The “Nike Swoosh,” while more realistic, might be overly optimistic as well.
However, this is the most important point
The U.S. economy will never return to either its long-term linear or exponential growth trends.
Read that again…
Policy Based On Unreliable Data
The data is so skewed by the “shutdown” that it has rendered all recovery projections completely unreliable. As noted recently by the IMF, many traditional “official statistics” are out of date at this point. To wit:
“The coronavirus is skewing economic data and making it hard to collect, which makes it difficult to understand the full scale of the virus’virus’s impact on the world economy, the International Monetary Fund said this week.
Without reliable data, policymakers cannot assess how badly the pandemic is hurting people and the economy. Nor can they properly monitor the recovery,” the IMF said in a blog post.
The pandemic has likely thrust the global economy into a crippling recession.
The IMF said, ‘innovative data collection methods’ are needed to tackle the discrepancies in data and assess the extent of the crisis.”
Such is a problem for policymakers, and ultimately for the markets.
Spit-Balled Solutions
If you read between the lines, policymakers are “spit-balling” solutions and making potentially erroneous monetary policy decisions on unreliable data. However, given Central Banks’ only policy tool is more liquidity, it is a “shoot first, ask questions later” response.
The problem is those policy measures continue to erode economic prosperity. Such is evident when the CBO’s own long-term economic growth potential projections fall below 2%.
Due to the debt, demographics, and monetary and fiscal policy failures, the long-term economic growth rate will run well below long-term trends. Such will ensure the widening of the wealth gap, increases in welfare dependency, and capitalism giving way to socialism.
“So for the Federal Reserve to intervene and support those asset prices, is creating a little bit of moral hazard in a sense you’re encouraging people to take on more debt.” – Bill Dudley
What could go wrong?
via ZeroHedge News https://ift.tt/3dLqPCC Tyler Durden
When the United States and China called a truce in their trade war late last year, arguably the most important part of the deal was China’s promise to increase imports of American goods by $200 billion by the end of 2021.
Don’t get me wrong: There were other important details too. The United States agreed to forgo another planned tariff increase that would have hiked prices for many consumer goods, and both sides agreed to a framework for resolving long-standing disagreements over intellectual property. But for President Donald Trump, who has complained for years about America’s trade deficit with China, the promise that China would import more American goods was clearly the key element of the bargain—as evidenced by the fact that he keeps talking about it.
Through the first four months of 2020, China has imported only about 45 percent of what it would have had to buy to be on pace to meet the deal’s goals, according to an analysis of trade data from both countries by the Peterson Institute for International Economics (PIIE). The so-called “phase one” deal between the two countries broke down the overall $200 billion promise into smaller, specific targets for agricultural goods, energy, and manufacturing outputs. So far, China does not appear to be close to hitting any of those goals:
Chad Bown, a senior fellow at PIIE, notes that the deal only stipulates that China must hit the year-end targets this year and next year. Still, the prorated totals for the first third of the year serve an illustrative purpose.
The COVID-19 pandemic is a factor. It has disrupted manufacturing and trade on both sides of the Pacific. But the bigger problem seems to be that the Chinese import targets were never all that realistic to start. As The Wall Street Journalnoted shortly after the deal was made public, Trump was effectively asking for “an unprecedented jump in bilateral trade.” To meet its obligations, China would have to hike its purchases of U.S. goods by 60 percent over the 2017 (pre–trade war) baseline.
That part of the agreement was “unrealistic at best” from the start, wrote Brookings Institution scholars Joshua Meltzer and Neena Shenai in February. Perhaps worse, the deal actually handed leverage to China for future negotiations. “Because these purchases are not market-based (if they were, the commitments would have been unnecessary), they actually create stronger U.S. dependencies on China,” Meltzer and Shenai wrote. “Because of its state-led and controlled economy, China could gin up demand to try and meet these commitments, but the spigot could likewise be turned off at any point and for any reason.”
Neither side seems to care much now about the trade deal or the fact that China is unlikely to meet its obligations. This week, the Chinese government asked state-owned companies to stop buying American pork and soybeans in response to the United States threatening retaliation for China’s crackdown on Hong Kong. If that happens, China’s already-low purchases of U.S. agricultural goods are likely to fall further.
Meanwhile, Trump said last month that he has no interest in revisiting the trade agreement. “Somehow, I lost a little flavor for it,” he told reporters on May 15, though he also told Fox Business he was “very disappointed in China” for failing to meet its obligations so far. While Trump’s top economic advisers continue to defend the deal, the president’s limited attention span seems to be focused elsewhere.
It now seems like the trade deal was always more of a political prop than anything else—a way for Trump to tout the supposed success of his trade war as he ran for re-election, while postponing any additional tariff increases until at least 2021. Shortly after the “big, beautiful” deal was signed in January, for example, he told farmers at a rally in Ohio they’d have to “buy bigger tractors” in order to meet the new demand from China.
But farmers, who have already borne the brunt of the Trump administration’s costly trade policies, are likely to get shortchanged again. The Trump administration is reportedly preparing another round of federal bailouts for farmers hurt by the trade war—a far cry from the promise that a deal with China would motivate farmers to buy bigger tractors.
Now that the Republican Party has decided its 2020 campaign strategy will be focused on anti-China hawkery, last year’s limited trade agreement probably matters less than it ever did. The only concrete accomplishment of Trump’s economically destructive trade war is looking like a dud.
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In an interview with Stuart Anderson in Forbes, published today, I discuss possible strategies for limiting presidential power over immigration by reforming a federal law that the Supreme Court has interpreted as giving the president virtually unlimited power to bar potential immigrants from entering the United States. Here is an excerpt:
Section 212(f) [of the Immigration and Nationality Act]… gives the president the power to bar entry into the U.S. by any foreign national whom he deems to be “detrimental to the interests of the United States…”
The Trump administration claimed – and the Supreme Court, in Trump v. Hawaii, the travel ban decision, largely agreed – that this gives the president authority to bar the entry of almost any noncitizen for virtually any reason he wants….
[I]f Section 212(f) really does give the president virtually unlimited authority to bar noncitizens from entering the U.S. whenever he pleases, then it would run afoul of the “nondelegation” doctrine, which limits Congress’ ability to delegate its powers to the executive.
Admittedly, it is often difficult to tell what qualifies as an excessive delegation. But the delegation of unlimited power to exclude any alien for any reason is surely a violation of the nondelegation principle if anything is….
If the Supreme Court is serious about nondelegation, it will eventually have to either strike down Section 212(f), interpret it more narrowly, or create what would be an ad hoc exception to nondelegation rules for immigration policy….
The best option would be to just repeal [212(f)] entirely. As Trump has shown, the power granted by the statute is ripe for egregious abuse….
Congress could [also] replace Section 212(f) with more limited authority allowing the president to bar entry only for specified reasons, such as a threat to national security or participation in organized crime or the like….
Finally, if Congress thinks the president needs the power granted by Section 212(f) to be able to take quick action in the midst of a sudden crisis, it could impose a sunset clause on exclusions imposed by the executive under Section 212. After, say, 60 days, such restrictions would automatically expire unless Congress affirmatively passes a bill to extend them. This would give the president flexibility to deal with emergencies, but also prevent him from using Section 212(f) to enact permanent immigration restrictions, as Trump has done with his travel bans.
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In an interview with Stuart Anderson in Forbes, published today, I discuss possible strategies for limiting presidential power over immigration by reforming a federal law that the Supreme Court has interpreted as giving the president virtually unlimited power to bar potential immigrants from entering the United States. Here is an excerpt:
Section 212(f) [of the Immigration and Nationality Act]… gives the president the power to bar entry into the U.S. by any foreign national whom he deems to be “detrimental to the interests of the United States…”
The Trump administration claimed – and the Supreme Court, in Trump v. Hawaii, the travel ban decision, largely agreed – that this gives the president authority to bar the entry of almost any noncitizen for virtually any reason he wants….
[I]f Section 212(f) really does give the president virtually unlimited authority to bar noncitizens from entering the U.S. whenever he pleases, then it would run afoul of the “nondelegation” doctrine, which limits Congress’ ability to delegate its powers to the executive.
Admittedly, it is often difficult to tell what qualifies as an excessive delegation. But the delegation of unlimited power to exclude any alien for any reason is surely a violation of the nondelegation principle if anything is….
If the Supreme Court is serious about nondelegation, it will eventually have to either strike down Section 212(f), interpret it more narrowly, or create what would be an ad hoc exception to nondelegation rules for immigration policy….
The best option would be to just repeal [212(f)] entirely. As Trump has shown, the power granted by the statute is ripe for egregious abuse….
Congress could [also] replace Section 212(f) with more limited authority allowing the president to bar entry only for specified reasons, such as a threat to national security or participation in organized crime or the like….
Finally, if Congress thinks the president needs the power granted by Section 212(f) to be able to take quick action in the midst of a sudden crisis, it could impose a sunset clause on exclusions imposed by the executive under Section 212. After, say, 60 days, such restrictions would automatically expire unless Congress affirmatively passes a bill to extend them. This would give the president flexibility to deal with emergencies, but also prevent him from using Section 212(f) to enact permanent immigration restrictions, as Trump has done with his travel bans.
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Democrats Unveil Sweeping “Police Reform” Bill Ending “Qualified Immunity” For Cops Tyler Durden
Mon, 06/08/2020 – 11:05
As the push for abolishing police departments intensifies, Democrats, led by House Speaker Nancy Pelosi, just unveiled the “sweeping” police reform bill that they’ve been talking about all weekend.
The “Justice in Policing Act of 2020” would ban chokeholds, establish a national database to track police misconduct and prohibit certain no-knock warrants, among a long list of other reforms.
Per WaPo, the bill would also change federal law so that victims of excessive force or other violations only need prove that officers “recklessly” deprived them of their rights to sue them in civil court. This limiting of “qualified immunity” has been cited as police unions as a major misstep that would dissuade recruits from becoming officers.
The Supreme Court first introduced qualified immunity doctrine in 1967 initially to help protect cops from frivolous lawsuits and financial liability in cases where they acted in good faith. Starting around 2005, courts increasingly applied the doctrine to cases involving the use of excessive or deadly force by police, prompting widespread criticism from progressive lawyers and the ACLU.
If passed, the bill would also expand DoJ powers to investigate and prosecute police misconduct, a capability that has been “undermined by the Trump administration,” the document said. It would grant subpoena power to the department’s Civil Rights Division to conduct “pattern and practice” investigations, and grant subpoena power to states attorneys offices to do the same.
Before unveiling the details of the legislation, Congressional Dems knelt for 8 minutes, 46 seconds, the amount of time George Floyd – whose killing 2 weeks ago by police revived the push for police “reform” – was on the ground before he was killed due to an officer knee to his neck.
