Wednesday, July 6, 2016

- No Accountabilty Means No Confidence

Blah, blah, blah. You never really thought she’d be indicted did you? To hell with all that. Let’s talk about something real. Let’s talk about the only remaining functional indicator of our societal health, the markets.

There is currently 10 Trillion in negative yielding debt available globally, and the US Treasury curve is getting closer to negative every single day. For you non-finance guys let me explain just a little bit of what this means. This means that if you want to loan money to an institution that is 'most likely' to pay you back, you have to pay for the privilege. It ‘costs’ money to lend to the government of Japan. I give the Japanese government a million dollars, and they promise to give me back 990,000 at some time in the future. No interest. Not even all my principle. It’s a guaranteed losing bet.

So what would inspire rational actors to do something that they are 100% certain to lose money on when they do?

Fear. They’re so afraid of losing $200,000 on a million dollar bet, that they’re willing to accept a guaranteed loss of something less. This is not a healthy circumstance. But it’s a natural result of allowing the increasingly expansive government to get involved in all aspects of our economy.

Government does two things differently than the decision makers in the private sector. Number one, they provide friction. The cost of administration of regulations slows down innovation, and provides barriers to entry for those small upstart companies that have in the past toppled commercial dynasties. Complain all you want about ‘unfairness’, but no monopoly could ever exist without government involvement in the industry. Government never makes things more 'fair' they only serve the entrenched. This is simply a fact of life.

Number two, they provide arbitrary and unpredictable decision making. Politics has its own reality where the guilty are considered innocent, the innocent guilty, and the rules can change on a dime if the people with power want them to change. At a whim, and in a way that’s totally disconnected from any reliably forecast-able consequences, the Federal government could decide to make whole industries unprofitable. We even have a recent example of this very thing - done to the insurance industry when they voted in Obamacare.

The true believers told us that Obamacare would be wonderful and make things cost less, but government involvement never costs less, and the people who wanted something for nothing voted it in because they believed it would let them pick someone else's pocket. As a result, and in the wink of an eye, the entire profit and loss landscape of the American medical industry changed. If you had loaned large portions of money to a health insurer the day before Obamacare got voted into effect, you would have lost a fortune. This is the effect of government decision making on ‘markets’.

Our government in the US is much too large, and its power is exercised in too arbitrary a fashion. The rules no longer apply to everyone, and that gives enormous power to those few people who are exempt from them. This may not be the paradise that the liberal rank and file were looking for, but it’s the paradise that their leaders always wanted. And they have now gotten exactly that. And it's looking like the markets don't like that much at all.

I’ve fretted on these pages that Donald Trump could be the one who takes down all of western civilization by ‘renegotiating the debt’. I saw that as unlikely but possible, and weighed it against the likelihood that Hillary would do things as a matter of liberal principle that would steer us more directly at the cliff’s edge. I didn’t really imagine she’d be able to ‘end it all’ because I thought she’d stay within the reasonable parameters of political expectation. I hadn't realized that for Hillary, none of those rules ever applied. That she was already prepared to break not just the rule of law, but the rules of reason and of physical reality. To her, whatever the rule is "It JUST DOESN'T MATTER", so long as it gets her the power she craves.

For her to end end western civilization I thought she’d have to try something she’d never really do - like unilaterally banning all handguns or something. But it’s looking today like all she really has to do is just ‘be herself’. Because Hillary 'just being Hillary' means that there really isn't anything she wouldn't do. She is a woman who is literally without any scruples whatsoever, and is no longer constrained by the rule of law. For over a decade Obama has been expanding the power of the Whitehouse where and how he could. If someone with as little accountability as Hillary is given that enormous power, then America really will have become a banana republic, and the markets will likely begin treating it like one.

Today, Trump looks like the safer economic bet to me. He may be ill informed and economically ignorant, but as a member of the private sector, he’s accustomed to staying as within the lines as he needs to. He’s always been accountable for his actions, and ironically his past bankruptcies are evidence of that. He didn't wave his hand or blackmail or bribe the justice department. He didn't pull strings until the consequences of his actions were nil. He lived with the consequences of admittedly imprudent decisions, and paid the price for them. He did just exactly what anyone one of us would do in similar circumstances.

But Hillary isn’t constrained by anything. Not force of law, not basic prudence, not loyalty, not fairness, not anything. From cattle futures, to foreign influence peddling, to the deaths of American diplomats, there is no price she's unwilling to pay. She is utterly consumed by her will to power and will stop at nothing to get it. And if she were elected, that’s the kind of thing that will really shake the market’s confidence in the future.

That's what you care about when you loan the government money for 30 years. You measure the odds that the rules are unlikely to change between then and now, and you'll get what is promised to you. And since we now know that there is literally nothing that will constrain Hillary's actions, I'm beginning to think that the markets will very likely see her election itself as a reason to finally go over the cliff.


chess said...

Well said... The O and all his exec order crap has laid the foundation for H. If the dems can gain the house/senate God forbid she may actually let laws she wants come on through the congress. If not she will do twice as much exec order than the O. I can only imagine what comes..She will leave the SCOTUS with ? 4 new judges. Game set match.
As to negative rates on sovereign debt I have a new theory. If the US could offer up 19 trillion in negative rates in essence the people could/ would give the government more money than they get back so we could pay off our national debt by funding massive amounts of debt at negative rates.?? The problem seems to be that the Japanese model isnt working because at some point in time you have to stop deficit spending... That dint happen there and it wont happen here.Markets are getting twitchy

Muzzlethemuz said...

Sooner or later the trash always has to get taken out.

Muzzlethemuz said...

And I see on tonight's NYT's they've turned Trump into the anti-semite and Hillary into a "survivor." RFNJ may be liberty's eulogy but it's epitaph is inscribed daily on the NYT's front pages.

Hell_Is_Like_Newark said...

A note about Japan:

In the usual Keynesian fashion, Japan has tried to stimulate consumption to stimulate the economy. In very typical Japanese fashion, the people are stuffing cash into their mattresses or buying gold. No point in putting the money in the bank if there is no positive yield.

So lots of Yen.. but no velocity of money...