David Takes on Goliath

Estimated Reading Time: 3 minutes

When growing up, “Polack” jokes were all the rage for a while. People would ask me if I were of Polish descent given my last name. I would answer no — that is for names ending in “ski” and not “sky.” I am Lithuanian. That was a made-up fable. Flash forward 40 years when a cousin located me after listening to the Dennis Prager radio show where I was a guest. We met up and he provided me with a complete family history showing my ancestors had come to America from a small town in Lithuania. My heritage was indeed validated after all. I currently could not be prouder to be from the great country of Lithuania.

That is because little Lithuania (with its three million residents) told China to take a long walk off a short pier. China has decided to try to crush Lithuania economically because it allowed Taiwan a representative office in their capital, Vilnius.

Because of their refusal to kowtow to China, the fascists who run China have blocked all imports from Lithuania. It gets worse. China is trying to crush Lithuania. Vice-Minister for Foreign Affairs, Mantas Adomenas, stated, “China has been sending messages to multinationals that if they use parts and supplies from Lithuania, the companies will no longer be allowed to sell to the Chinese market or get supplies from China. We have seen some companies cancel contracts with Lithuanian suppliers.” 

One might think such an action is against the World Trade Organization (WTO) rules. The WTO, where President Clinton supported China becoming a member, has once again proved their worthlessness by not stepping in to stop this obviously unacceptable act by the Chinese. 

If you are not aware, China is preying on smaller countries by using their economic might to crush any opposition to their plans and to assure non-recognition that Taiwan even exists on the planet. They have really dug themselves into the Western Hemisphere unlike any country has since the Monroe Doctrine was issued in 1823. 

The Dominican Republic, El Salvador, and Panama stopped their recognition of Taiwan in favor of China. These three countries, which would have a greater affinity to Taiwan because of their size and desire to stay independent, have been bought off by China. These countries are just a few of the Western Hemisphere countries playing footsie with China. Other countries in Latin America like Brazil, Argentina, Peru, and Chile, have close economic ties with China and would be pressured by the Chinese bullies to comply with their policy wishes.

This is what makes Lithuania’s stand more unique. The bigger question is what will the EU do? The EU did state they are launching an investigation into whether the WTO rules have been violated by China’s actions against a member state. It is yet to be seen whether Lithuania’s actions will cause a real rift between the EU and China. It will be a test of whether the EU leadership has a commitment to its member states or whether the larger EU members (France and Germany) are the unprincipled money-grubbing lackeys I have always thought them to be. At a recent meeting of the 27 members, the issue was not even brought up as France — which holds the rotating six-month presidency of the EU — vetoed it. 

A recent EU statement: “The EU remains committed to its One China Policy and recognizes the government of the People’s Republic of China as the sole government of China.” That is all well and good if we were still living in the 1970s when there was still some question as to whether the government of Taiwan had any interest in going back to the mainland. Fifty years later Taiwan is an independent democracy of 24 million people who want to maintain their independence from the Bullies of Beijing. 

The Free World must back Lithuania here and tell China to stop its unreasonable demands that the world comply with all its actions. If we do not draw a line here, they know we will do nothing to stop them from taking over Taiwan. The first country that needs to step up and back the Lithuanians is you guessed it – the United States. This is a good test of the backbone of Joe Biden and Antony Blinken.

 

They Are Neither Socialists nor Communists

Estimated Reading Time: 5 minutes

A wise man during a recent lunch pointed out to me that Republicans and Conservatives often banter about terms, calling Leftists either Socialists or Communists. Mark Levin has an excellent, well-researched, bestselling book out on the subject called American Marxism. But are they really?

This very thoughtful and insightful person stated that they really are not Marxists, etc. He suggested I write a piece on the topic. Here we are.

Most Leftists have abandoned the name Communists because it became tattered — not because of the failed policies or the millions of people murdered. The reason is because of the collapse of the Soviet Union. With the collapse, Leftists have abandoned the term much like they stopped calling themselves Liberals and have since ruined the word progressive.

The preferred term these days is “Socialist.” They have even become more inventive with many calling themselves “Democratic Socialists.” The Democratic Socialists of America (DSA) has sold itself a bill of goods that they are not totalitarians. They just want all decisions made through the government.

If they are neither Socialists nor Communists, what are they? They are something you cannot call someone without casting a negative aspersion on them or you or both. What they are and what my enlightened friend pointed out is that they are Fascists. Now that your ears are burning, hear me out on this because my friend is correct.

Fascism used to compete with Communism. The reality is both are a form of totalitarian government that oppresses and murders people, but they are distinctly different. That is why in the late 1920s and early 1930s, the two groups were fighting on the streets of Germany to contest the ruling government. As you know, the Fascists won that battle and the Nazis became the symbol of evil for all mankind.

So why was my friend correct that they are Fascists? Communism is a manner of government where all the means of production is controlled centrally. There is no division between the government and the economy.

Fascism is central control through a capitalist system. Socialism nationalized property explicitly, while fascism coopts the means of production by requiring owners to use their property in the “national interest”—that is, as the totalitarian authority wants it used. That is why after WWII Germany was able to again become a productive society so quickly despite the complete devastation of the country. Their industrial leaders (capitalists) were still in place after the war. Think Volkswagen.

If you think of post-war China which is often called Communist China, it has not been Communist the entire time. Certainly, it started out as Communist under Mao Tse-Tung. They even had the Cultural Revolution in the 1960s so Mao could cleanse the country of capitalism. Then Deng Xiaoping came to power acknowledging that Communism does not work as an economic system and the country was a mess. He instituted changes that allowed capitalism to flourish in the country. Currently, Xi Jinping is cracking down on capitalists and their companies, thinking he can go back to the days of Mao without killing their economy. Notice all the capitalists he is either harassing or arresting. We will see how that works out. But for over 30 years China was fascist and still is. It just has not acknowledged it.

We are experiencing a lot of fascism in America. Interestingly, it radiates mostly from those who state they are anti-fascists. For example, look at how free speech is being suppressed. Anybody who is not a lying politician knows the Left has been suppressing free speech through private companies, the most prominent of which are Facebook, Google, Twitter, Instagram, YouTube, and others. These companies function as news services while stating they are exempt from normal press rules allowing them to block speech the Left does not like.

The entire pandemic has operated in a fascistic manner through private industry. Face mask mandates, vaccine mandates, proof of vaccination mandates, mask mandates on airplanes. Companies are forced to use resources to control their customers while the companies’ non-compliance would result in significant financial penalties.

When President Biden announced private industry vaccine mandates, he had no authority. He stated the rules would be issued through the Occupational Safety and Health Administration (OSHA). Every company fell in line except to my knowledge one — The Daily Wire. For over two months there were no rules, but companies were complying. As soon as the regulations were issued multiple lawsuits were filed and many courts ruled against the mandate. Yet so many companies were used to our government operating in a fascistic manner they just complied based on a speech by the President.

States, particularly ones run by Leftists, have gotten into the act. They have forced their policies down the throats of capitalist companies. We who live in California have a multitude of these diktats forced on capitalist companies who once again are subject to severe penalties for non-compliance. For example, you cannot get a straw for a drink in California unless you beg for it. Now you cannot get plastic silverware with take-out food unless you beg for it. Neither of these rules will solve any kind of pollution problems, but legislators are fascists and keep issuing these diktats.

Recently, they required stores to have gender-neutral toy shelves if they are selling toys. There are hundreds of these kinds of top-down fascistic rules where legislators who have never run a business control businesses that are just trying to operate and produce a profit.

If you think that these fascist directives for business just affect major businesses – think again. Gardeners are typically entrepreneurial immigrants who are working their way up the economic ladder for themselves and their families. There is not a high level of education needed nor are the businesses capital intensive. California has outlawed a mainstay of these hardworking people’s tools – gasoline leaf blowers and lawnmowers. Not only will these people need to buy new battery-operated equipment, but it is estimated a three-person crew will need to carry with them 30 or more fully charged batteries to complete their daily workload. Another fascistic order telling small businesses how to operate.

Fascism is attractive to these totalitarians. They do not have to control the means of production; they just control the laws under which the method of production works. Use the wrong material in a building and you are fined. Do not enforce the Fascists’ laundry list of incomprehensible rules and you are fined. The Fascists line their coffers while getting their societal plans enforced. They use the fines to force more diktats down the throats of people just trying to make a living. And as opposed to Communism, in a Fascist government the companies are capable of producing a product like an automobile or a washing machine.

Whether Communist, Socialist, or Fascist, they are all totalitarians. They are all run by people who think they know better than the average person, so they try to tell people how to run their lives. The name “Fascist” was ruined forever by Hitler and his gang of thugs. The Left likes to tell you that Fascism is right-wing which is the big lie. It is akin to Communism but just differs in the means of production. Communism’s means of production has failed everywhere it has been tried. So, what is a totalitarian to do other than become a Fascist but call themselves Socialists?

Most Reckless Fed Ever: “Real” Federal Funds Rate Now the Most Negative Ever

Estimated Reading Time: 2 minutes

After a year of brushing off inflation as temporary, while inflation spread deeper and further into the economy, and got worse month after month, the Fed is finally talking about tightening. But so far, it’s just talking about it. It’s still repressing short-term interest rates to near 0% – with the effective federal funds rate, which the Fed targets with its interest rate policy, at 0.08%. And the Fed is still printing money hand-over-fist, though at a slightly slower rate than two months ago.

Meanwhile, the broadest measure of inflation, the Consumer Price Index (CPI-U) jumped by 7.04%, the highest and worst since June 1982, according to data released by the Bureau of Labor Statistics today. But we cannot compare today to 1982:

  • In June 1982, inflation was coming down; now inflation is spiking.
  • In June 1982, the effective federal funds rate (EFFR) was 14.2%. Today it’s 0.08%.
  • In June 1982, the Fed did not engage in QE; today it’s still massively buying assets.

So now we have the bizarre situation where the EFFR is 0.08% and CPI-U inflation is 7.04%, and the inflation-adjusted EFFR, or “real” EFFR, is a negative 6.96%, the most negative real EFFR in the data going back to 1954:

The “real” interest rate on savings accounts and CDs is similarly negative in the -7.0% range. The real yield of short-term Treasury bills is similarly negative in the -7.0% range.  Even the 10-year Treasury yield, now at 1.7%, is -5.3% in real terms.

Even most junk bonds are traded with yields below the rate of inflation. The average BB-rated “real” junk bond yield is -3.3%. Taking more risk, the average B-rated “real” yield is -2.0%…..

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Continue reading this article at Wolf Street.

‘We Will Cut Taxes.’ Ducey Lays Out His Final Arizona Budget Priorities

Estimated Reading Time: 2 minutes

Arizona Gov. Doug Ducey is reaffirming his commitment to lowering the state’s tax burden.

In his final budget address, the Republican governor took the podium in the joint session of the state Legislature on Monday to give special attention to his seven-year record of shrinking and streamlining government.

“We will cut taxes,” Ducey said. “It’s really not that complicated; it’s just basic common sense. Government takes in more than it needs to pay the bills, and the taxpayer should get to keep his or her hard-earned dollars.”

The speech marks Ducey’s eighth and final budget address. The two-term Republican is term-limited after the current year. Ducey boasted about the state’s historic tax cut that he signed but remained tied up in court, contrasting it with federal proposals to increase taxes.

“It all makes our commitment of returning money to the people more important than ever. Washington D.C. might have their eye on your paycheck – but at this Capitol, the only special interest on our mind is the taxpayer,” Ducey said.

If it withstands a legal challenge, Arizona’s progressive income tax that tops out at 4.5% would gradually flatten out to 2.5% with another cut for wealthy filers who must pay Prop. 208’s 3.5% surcharge for income over a certain amount.

Ducey highlighted Arizona’s economy, one of the few states fully recovered from the pandemic-related job losses. A report from Arizona’s Office of Economic Opportunity estimates the state will create an additional 700,000 jobs by 2030, many of which are in the technology sector.

In addition to educational programs to assist in learning loss, Ducey proposed a new push to educate Arizonans to take on technology jobs. Computer chip fabrication factories such as Intel, solar panel companies like Meyer Burger and others plan to expand in Arizona in the coming years. Ducey wants to provide the education needed to fill these high-paying jobs.

“Let’s invest in the worker, arming them with the skills they need for our growing semiconductor and advanced manufacturing industries,” he said. “So come June, we’re launching a summer camp with an emphasis on catching kids up in key areas: math, reading, and American civics. We will lead the way to eliminate learning loss.”

Despite pay increases in recent years, Arizona public school teachers remain some of the lowest-paid in the nation.

As of Jan. 1, Arizona is officially in a Tier 1 Colorado River water shortage. The change doesn’t affect residential Arizonans, but the nearly 18% reduction of water to the state will hit the agriculture industry. To address this, Ducey is proposing a $1 billion investment to “secure Arizona’s water future for the next 100 years.”

Ducey plans to submit his budget for legislative consideration on Friday.

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This article was published by The Center Square and is reproduced with permission.

Youth Depression, Suicide Increasing During Pandemic Response

Estimated Reading Time: 4 minutes

As data on the unintended consequences of pandemic policy becomes gloomier, policy makers are beginning to acknowledge tradeoffs.

Government policies meant to curtail the COVID-19 pandemic have resulted in unintended consequences that threaten lives—including, tragically, the lives of young people who are generally spared from the worst effects of COVID-19.

School closures, stay-at-home orders, and shutdowns of businesses deemed “non-essential” are contributing to surging rates of depression and suicide among young people, as well as rising incidences of drug overdoses and related deaths.

The New York Times reported this week that an alarming increase in student suicides has prompted schools in Las Vegas to move quickly to reopen schools for in-person learning. In the Clark County, Nevada school district, 18 students took their lives during the nine months of school closures, which is double the number of students who committed suicide in the district in all of 2019. The youngest child was just nine years old.

According to the Times: “One student left a note saying he had nothing to look forward to.”

Youth despair amid lockdowns and related public health orders appears to be worsening. While US aggregate suicide data for 2020 won’t be available for a couple of years, due to reporting lags, state and county-level data reveal dismal trends. In Pima County, Arizona suicides were up 67 percent in 2020 compared to the previous year for children ages 12 to 17, and statewide childhood suicides had also increased since 2019. West Virginia has seen a spike in student suicide attempts during the pandemic. Parts of Wisconsin reported skyrocketing suicide rates among young people in 2020, while hospitals in Texas and North Carolina are seeing more young suicidal patients.

CDC data show a 24 percent increase in emergency room mental health visits for children ages 5 to 11, compared to 2019. Among adolescents ages 12 to 17, that increase is 31 percent. Last summer, the CDC reported that one in four young adults had contemplated suicide in the previous month.

Childhood and adolescent mental health has been deteriorating over the past decade, with youth depression and suicide rates climbing. But the isolation and hopelessness brought on by the pandemic response has exacerbated this trend. Earlier this month, a high school student and football star in Illinois, who had struggled previously with depression, committed suicide. His father says that his son’s “depression worsened significantly after Covid hit.”

Another high schooler and football player in Maine, Spencer Smith, took his own life last month after leaving a note saying that he felt locked in his house and the peer separation with remote learning was too much for him to bear any longer. “The kids need their peers more than ever now,” his father, Jay Smith, said. “They need face-to-face contact so they can let their emotions out.”

Some researchers recognized early on in the pandemic that there would be significant unintended consequences of lockdowns and government orders, warning of high mental health costs and other declines in public health. “The COVID-19 crisis may increase suicide rates during and after the pandemic,” noted a June 2020 paper in QJM: An International Journal of Medicine. “Mental health consequences of the COVID-19 crisis including suicidal behavior are likely to be present for a long time and peak later than the actual pandemic.”

Later, the authors of the Great Barrington Declaration, a document that urges a “focused protection” response to COVID-19 rather than universally restrictive pandemic policies, explained that public health policy must look at all aspects of public health—not just one virus and not just near-term effects.

Harvard University biostatistician, Martin Kulldorff, told The Wall Street Journal that “you can’t just look at COVID, you have to look holistically at health and consider the collateral damage.” One of the authors of the Great Barrington Declaration, Kulldorff adds: “You can’t just look short-term.”

What Kulldorff and other public health researchers expose is the fact that there are tradeoffs to any policy.If it saves just one life,” a mantra echoed during the COVID response as a rallying cry for lockdowns, fails to acknowledge the lives damaged or lost due to these lockdown policies. Lockdown harms and deaths are as real as COVID harms and deaths and should be taken seriously when considering a holistic pandemic response.

Economists scrutinize tradeoffs, and many have been highlighting COVID-related tradeoffs since last spring. As FEE’s Antony Davies and James Harrigan wrote in April: “Regardless of whether we acknowledge them, tradeoffs exist. And acknowledging tradeoffs is an important part of constructing sound policy.”

This basic economic principle was beautifully articulated by Henry Hazlitt in his classic book, Economics in One Lesson:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Nine-tenths of the economic fallacies that are working such dreadful harm in the world today are the result of ignoring this lesson. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups.

As data on the unintended consequences of pandemic policy becomes gloomier, policy makers are beginning to acknowledge tradeoffs. School reopenings in Las Vegas are one positive sign of this policy shift, but more needs to be done to loosen harmful pandemic restrictions and allow for social and economic life to rebound.

The justification for the widespread lockdowns and pandemic restrictions enacted since last spring was to save lives, but it’s becoming increasingly clear that these mandatory measures are costing lives and may be ineffective at slowing the spread of the coronavirus.

This is particularly important now as more research shows that the harms of lockdowns and related policies may outweigh their benefits. A new peer-reviewed study in the European Journal of Clinical Investigation finds that restrictive, mandatory policies may not be any more effective at controlling the spread of the coronavirus than more voluntary measures.

“We do not question the role of all public health interventions, or of coordinated communications about the epidemic, but we fail to find an additional benefit of stay-at-home orders and business closures,” the researchers conclude.

There is no perfect policy response to a pandemic, but acknowledging tradeoffs, examining consequences across groups and over time, and advocating for a more voluntary, decentralized approach can minimize human costs and maximize overall health and well-being.

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This article is reprinted with permission from FEE, Foundation for Economic Education.

3 Reasons Nuclear Power Has Returned to the Energy Debate

Estimated Reading Time: 3 minutes

If we believed our own rhetoric about the climate crisis, support for nuclear would be much higher.

If you still needed proof that nuclear energy has returned to the conversation after decades of disfavor, it came with an unexpected celebrity boost last month. Tesla CEO Elon Musk and the Canadian singer Grimes separately used their star power to advocate against the closure of nuclear power plants, echoing growing pressure for California to reconsider plans to shut its last such plant. Over the weekend, Europe also saw a fresh boost for nuclear energy with the leaked draft of a European Commission plan to include zero-carbon nuclear energy on its list of what counts as a “green” investment.

Notwithstanding Germany’s long-planned closure of three of its remaining six nuclear plants on New Year’s Eve, even as Europe struggles with energy shortages, support from celebrities and the EU was just the latest in a string of good news for nuclear energy in 2021. In the United States, private investment in nuclear projects and companies reached eye-popping levels. U.S. Energy Secretary Jennifer Granholm became increasingly vocal in support of nuclear power as a zero-carbon energy source. In Europe, several countries—including France—recently announced new plans to build nuclear reactors in order to meet looming deadlines to decarbonize their electricity systems.

A decade after the Fukushima nuclear accident set back nuclear power’s prospects worldwide, the outlook may finally be brightening for three reasons: the urgency of meeting increasingly ambitious climate goals, significant advances in nuclear technology, and national security concerns about China’s and Russia’s growing leadership in nuclear power.

Until recently, nuclear power’s outlook seemed bleak. Following Fukushima, Japan suspended nearly all of its 50 nuclear reactors; today, only nine have resumed operations. Several other countries, most notably Germany, decided to phase out nuclear power. Still others, such as Spain, Switzerland, and Italy, scrapped plans to add new nuclear plants. Between 2011 and 2020, a total of 65 reactors were either shut down or did not have their operational lifetimes extended.

In the United States, the number of nuclear reactors peaked at more than 100 in 2012. Since then, 12 reactors have been shut down, while only one was added. (Nuclear power continues to supply about 20 percent of total U.S. electricity generation.) Cheap natural gas unlocked by the shale revolution and dramatic cost declines in wind and solar power have made it harder for nuclear power to compete. Meanwhile, projects to build new nuclear power plants in the United States have ballooned in cost, seen their timelines lengthened, or been scrapped altogether. Two reactors being built in Georgia are now projected to cost twice as much and take more than twice as long to complete as originally estimated. Two other reactors under construction in South Carolina were scrapped in 2017 after $9 billion in expenditures, leaving ratepayers with nothing to show for their money.

So, given all these setbacks, why the sudden new interest in nuclear power?

First, as the urgency to combat the climate crisis grows, there is growing recognition that the pathway to net-zero emissions will be faster, easier, and cheaper if nuclear energy is part of the mix of solutions.

As Grimes explained in her viral video calling for California to reverse its decision to shut the Diablo Canyon nuclear plant, “This is crisis mode, and we should be using all the tools that we have.” She went on: “If we push the closure back by a decade, it will help the state decarbonize faster and make the transition to clean energy faster and cheaper.”

The pop star’s claims are backed up by analysis. To achieve net-zero emissions by 2050, global electricity use will need to more than double, according to the International Energy Agency (IEA), as cars, home heating, and other sectors are electrified. Vast amounts of electricity will also be required to make fuels, such as hydrogen and ammonia, to power sectors that are harder to electrify, such as ship transportation and steelmaking.

What I See for 2022: Interest Rates, Mortgage Rates, Real Estate, Stocks & Other Assets as Central Banks Face Raging Inflation

Estimated Reading Time: 3 minutes

An extra-special cocktail of three powerful ingredients with no cherry on top awaits us in 2022.

Super-inflated asset prices such as housing, stocks, and bonds; massive inflation; and central banks that have started to react.

Many central banks have started pushing up interest rates; others have ended asset purchases. And Quantitative Tightening (QT) – central banks shedding assets – is on the table.

Rising interest rates in the US won’t catch up with raging inflation in 2022 – CPI inflation is now 6.8%, the highest in 40 years.

But unlike 40 years ago, inflation is now on the way up. In the early 1980s, it was starting to head down. We need to compare the current situation to the 1970s, when inflation was spiraling higher. So we’re entering a new environment where the economy will be doing things we haven’t seen in many decades. It will be a new ballgame for just about everyone.

Inflation has now spread deep into the economy, with services inflation picking up, and there are no supply-chain bottlenecks involved. This includes the inflation measures for housing costs. Those housing inflation measures have begun to surge.

We know that the figures for housing inflation, which account for about one-third of total CPI, will surge further in 2022, based on housing data that we saw in 2021, and that is now slowly getting picked up by the inflation indices. They started heading higher in mid-2021 from very low levels, and they’re going to be red-hot in 2022.

This is inflation is fueled by enormous monetary and fiscal stimulus, globally, but particularly in the US – with nearly $5 trillion in money-printing since March 2020, and over $5 trillion in government spending of borrowed money.

The stimulus has broken price resistance among businesses and consumers. Enough businesses and consumers are willing to pay even the craziest prices – a sign that the inflationary mindset has taken over for the first time in decades. All this stimulus has broken the dam.

Inflation is not going away until central banks remove the fuel via QT to allow long-term interest rates to rise, and by pushing up short-term interest rates via rate hikes, and until these policy actions are drastic enough to shut down the inflationary mindset and reestablish price resistance among businesses and consumers.

Central banks around the world react

The Bank of Japan ended QE in May 2021 – the longest-running money-printer has stopped printing money.

The Fed started tapering QE in November and doubled the speed of the taper in December. If it doesn’t accelerate it further, QE will end in March.

The Bank of Canada ended QE in October. The Bank of England ended QE in December. The ECB announced that it would cut its huge QE program in half by March. Several smaller central banks that did QE have ended it.

Central banks in developed markets already hiked rates:

  • The Bank of England: by 15 basis points, in December, for liftoff.
  • The National Bank of Poland: three hikes, totaling 165 basis points, to 1.75%.
  • The Czech National Bank: five times by a total of 350 basis points, to 3.75%.
  • Norway’s Norges Bank: for the second time, by a total of 50 basis points, to 0.5%.
  • The National Bank of Hungary: many small hikes totaling 180 basis points, to 2.4%.
  • The Bank of Korea: twice, by 50 basis points total, to 1.0%.
  • The Reserve Bank of New Zealand: twice, by 50 basis points total, to 0.75%.
  • The Central Bank of Iceland: four times, by 125 basis points in total, to 2.0%.

Central banks in developing markets have been much more aggressive in hiking rates to get inflation under control and protect their currencies; a plunge in their currencies would make dollar-funding very difficult. They’re trying to stay well ahead of the Fed. Among them:

  • The Central Bank of Russia: seven times, totaling 425 basis points, to 8.5%.
  • The Bank of Brazil: multiple huge rate hikes, by 725 basis points since March, to 9.25%.
  • The Bank of the Republic (Colombia): three hikes totaling 125 basis points, to 3.0%.
  • The Bank of Mexico: five hikes, totaling 150 basis points, to 5.5%.
  • The Central Bank of Chile: four hikes, 350 basis points in total, to 4.0%.
  • The State Bank of Pakistan: three hikes, totaling 275 basis points, to 9.75%.
  • The Central Bank of Armenia: seven hikes, totaling 350 basis points, to 7.75%.
  • The Central Reserve Bank of Peru: five hikes, totaling 225 basis points, to 2.5%.

There are some exceptions, particularly Turkey, which has embarked on an all-out effort to destroy its currency via inflation and is succeeding in doing so by cutting rates. Over the year 2021, the lira has collapsed by nearly 80% against the dollar, with inflation raging at over 20%.

But in the US in my lifetime, there has never been a toxic combination of interest-rate repression to near-0%, amid 6.8% inflation, as the Fed’s money-printing continues for now.

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Covid-19 Economic Zombification

Estimated Reading Time: 6 minutes

Editors’ Note: Discussion of “Minsky Moments” may strike the reader as obscure. However, it is noted in this article that the whole world, including real estate much of the private corporate sector, has become more leveraged than before the 2008 financial crisis. With the sharp rise in inflation,  global central banks have the difficult choice of either letting the inflation run, or increasing interest rates and reducing money supply growth, the very fuel which is supporting the record-setting debt expansion. Either choice could be upsetting to financial markets. Economic trauma always takes on greater power when financial leverage is excessive. Just as debt expansion fuels the boom, its contraction can fuel a bust. Thus, for those of us with money in markets, either building our estates or living off our estates in retirement, this issue becomes very immediate. Economic theory cannot time these events precisely but it can tell us the kind of environment in which we are operating. This level of debt, coupled with a sharp rise in inflation, suggests some sort of confrontation is ahead with serious consequences for investors. That confrontation is the Minsky Moment, and it can be very real for those with money at risk.

Economists and finance specialists are warning of the potential arrival of a new “Minsky moment” in increasing numbers. The last time this term was used with such conviction was in 2008, at the onset of the Great Recession. It seems that 2021–22 could have some parallels with the world’s last severe recession.

The Twentieth-First Century: The Century of Debt

Until now, the 21st century could be called the century of debt, and if things continue the way they are, it could well be called the century of the great debt default. At the beginning of the century, extremely low-interest rates promoted by central banks in practically the entire developed world caused a frenzy of private credit creation and a gigantic financial and real estate bubble that exploded in 2008 with dire consequences for the world economy.

Central banks, heavily pressured by politicians, redoubled their commitment to low-interest rates, causing public overindebtedness to a degree unprecedented in times of peace. In 2020, when the growth model based on the accumulation of public debt and low interest rates seemed to start to weaken, the Covid-19 recession arrived. The worldwide excess of public spending in 2020 has not been corrected, and it does not appear it will be corrected anytime soon. The new public debt is adding fuel to the fire. And the accumulation of it (and also private debt, especially that issued by companies) could be reaching the point of no return.

Global debt reached $200 trillion at the beginning of 2011, while global GDP was $74 trillion (275 percent debt/GDP). In the second quarter of 2021, global debt reached almost $300 trillion with a global GDP of $83.9 trillion (330 percent debt/GDP).

What Is a Minsky Moment?

Hyman Minsky was a post-Keynesian economist who developed a very insightful taxonomy of financial relationships. According to him, the finances of a capitalist economy can be summarized in terms of exchanges of present money for future money. The relationship proposed by Minsky is as follows:

Present money is invested in companies that will generate money in the future.

When companies make a profit, they return the money to investors from their profits.

Income or profit expectations determine the following:

  1. The flow of present money to companies
  2. The price of financial assets such as bonds and stocks (financial assets that articulate the exchange of present money for future money)

Present business income, meanwhile, determines the following:

  1. Whether expectations about past income (included in already-issued financial assets) have been met
  2. How to modify expectations about future income (and therefore, indirectly, the flow of present money to companies and the price of financial assets issued in the present)

Minsky articulates three possible types of income-debt relationship in companies (although he extends the analysis to all economic agents):

  1. Hedge. Hedge finance companies can meet all of their debt obligations with their cash flows. That is, their inflows exceed their outflows. Such companies are stable.
  2. Speculative. Companies can pay the interest on their debt but cannot pay down the principal. They are forced to constantly refinance. These companies are unstable, as any minor problem can bankrupt them.
  3. Ponzi. Ponzi companies do not generate enough income to pay down the principal or pay the interest. They must sell assets or issue debt just to pay the previous interest on their debt. They end up defaulting on the new debt sooner or later. Their chances of survival are minimal.

According to Minsky, when things are going well in an economy and income expectations are met, corporations begin to err on the side of optimism and excessively increase their debt. This causes a shift from a stable situation (in which hedge companies are the norm) to an unstable one (in which Ponzi companies are the norm). In a Ponzi situation, the economy will experience widespread defaults and a financial and economic crisis.

An economy is said to be in a Minsky moment if debtors are unable to pay down their debts (a speculative situation) or unable to pay the interest and the principal (a Ponzi situation).

Minsky was partly right. He accounts for a common truth of financial crises: issuance of debt was abused in previous periods. As a caveat, though, taking into account monetary and financial state interventions—mainly but not solely those of central banks—perhaps the cause of this degradation of debt quality is not a market problem, or at least not exclusively. The crisis may be exogenous to the market (caused by public authorities) or endogenous but amplified by exogenous factors (public authorities contribute to it).

The Economy Has Been Zombifying for Two Decades

As already discussed, global debt has grown more rapidly than the global economy over the last ten years, so it seems credit quality has indeed degraded. The income needed to pay off debt is growing much more slowly than is the debt itself.

An additional piece of evidence to support this argument is the increase in the number of “zombie companies.” A zombie company is one whose earnings before interest and taxes are less than or equal to its debt service (it coincides exactly with Minsky’s definition of speculative and Ponzi companies, taken together). A zombie is a wonderful metaphor because a zombie moves and appears to be alive but is in fact dead. A zombie company also moves and appears to be alive—it generates activity, employs workers, and produces goods—but in reality is (almost) dead. It is (almost) certain to die given its inability to pay its debt with its own means. The number of zombie companies has increased exponentially in the United States in recent years, according to a Bank for International Settlements (BIS) report. Furthermore, the probability of remaining in a zombie state has increased. And in fact, zombification is a reality in almost every part of the world.

Figure 2

Source: Banerjee & Hofmann

Figure 3

Source: Banerjee & Hofmann

However, the BIS data end in 2017. What has Covid-19’s impact been on an already-zombified global economy?

Covid-19 Hit a Zombie Economy: Now What?

The most recent data on company interest coverage (financing cost/earnings) are from the Fed, and refer to the North American economy. In the figure below we can see that the median coverage ratio began to fall at the end of 2018, which is consistent with our hypothesis that the economy’s growth model, based on cheap debt, was beginning to run its course. The pandemic has hammered the median coverage ratio. Although the ratio has been recovering since the second half of 2020, it is currently at the level seen in 2009, in the middle of the Great Recession.

Even more revealing is the interest coverage ratio of the companies in the first quartile (that is, the 25 percent of companies with the lowest ratio). This indicator has been below 1 since 2012; in other words, zombification has accelerated since then. Keep in mind that a ratio lower than 1 means that a company’s profits are insufficient for it to pay its financing costs (it is a Ponzi company).

The interest coverage ratio for companies in the twenty-fifth percentile reached almost 0 just before the pandemic (their profits had almost disappeared). Since then, the ratio has been negative (these companies recorded losses). Observe that these companies have not recovered, while companies in other quartiles have. Their ratio is currently just above −1, which means that their losses (before interest) are nearly equal to their financing cost. This is a total disaster. At least 25 percent of US companies are financially dead.

Valuation of Zombified Companies

One would expect that these companies would begin to go bankrupt, and this is indeed what is happening. According to the Fed, 2.5 times more zombie companies (as a fraction of all companies) went bankrupt in 2020 than in 2019 (<2 percent in 2019 and around 4.5 percent in 2020).

Curiously, the zombie companies that survived 2020 are seeing their valuation skyrocket. Their aggregate value already exceeds $6 trillion, while in 2019 it was close to $2 trillion.

Figure 5

Conclusion

Markets are now extremely complacent. The fundamentals do not seem to justify their optimism. Zombie companies, which were already a problem in 2019, have not been killed off; indeed they have multiplied. The zombie apocalypse could be closer than we imagine.

*****

This article was originally published by AIER, American Institute for Economic Research and is reproduced with permission.

Phoenix Six-Figure Job Growth Ranks Second Among Large U.S. Metros

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Phoenix has the second-highest percentage change in high-paying jobs out of a list of large U.S. metros, according to a Stessa report.

Phoenix saw a 217.1% increase in six-figure jobs from 2015 to 2020, marking the second-largest percentage increase among the nation’s largest metropolitan areas.

More Phoenix workers made six-figure salaries in 2020 than the national average. Out of Valley workers, 180,740, or 8.6% of the workforce, made six-figure salaries in 2020, while only 7.9% of workers nationally made $100,000 or more. Only 57,000 workers in the Valley reported salaries of $100,000 or more in 2015. Phoenix’s percentage beats all but two of the study’s 15 largest metros, including first-ranked Nashville.

“We are leading the nation in high-wage industry growth, including semiconductors, electric vehicle manufacturing, biosciences, start-ups and more,” Phoenix Mayor Kate Gallego’s office told The Center Square. “Our efforts to accelerate and strengthen the business operating environment in Phoenix and the greater region are reflected in this exciting job growth, a sign of our economic vitality.”

In response to the report, Gallego called Greater Phoenix a “national leader and top relocation destination for families, jobs, and businesses.”

Phoenix provides residents with more opportunities and a higher quality of life, Gallego said.

Tucson ranked eighth on the list with a 156.2% percentage change in six-figure jobs between 2015 and 2020.

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This article was published on January 1, 2022, and is reproduced with permission from The Center Square.

Arizona Republic Report Leaves Out Important Details and Context On Universal Licensing

Estimated Reading Time: 4 minutes

The Arizona Republic recently published a report entitled, “Universal Licensing: Arizona opened the doors to less qualified workers‐​the public bears the risk.” In its investigation of Arizona’s universal licensing recognition law enacted in 2019—a reform so successful and popular that it is being emulated by more than a third of other states—it mentioned irrelevant incidents and presented out‐​of‐​context data to malign this bold and enlightened reform.

The article begins and ends with a heart-wrenching story about a California‐​licensed veterinarian who received a temporary Arizona license, granted under a 1967 law, to work at a Mesa, Arizona clinic. She’s been accused of poor surgical technique while operating on a kitten brought to the clinic on death’s doorstep. The kitten died and the veterinarian was fired from the clinic. Her temporary license expired after 30 days, and she was never granted the permanent license for which she applied. Yet readers are expected to view this as an indictment of Arizona’s universal licensing law.

Universal licensing dilutes the authority of state occupational licensing boards, so it is no surprise that a spokesperson from an organization representing that constituency, the Federation of Associations of Regulatory Boards, would be quoted in the article criticizing universal licensing over the fact that Arizona grants licenses to workers from states with less onerous licensing requirements—providing their out‐​of‐​state licenses are in good standing for at least a year.

It is wrong to assume that more onerous requirements are better. In many cases, incumbent occupations lobby state licensing boards to make requirements tougher for new entrants, usually “grandfathering” those already licensed, to reduce competition. Thus, EMTs must complete, on average, 33 days of training and pass 2 exams to get a license while cosmetologists need 11 months of training and interior designers need 73.

When it comes to the medical profession, licensing requirements are virtually identical in all 50 states and the District of Columbia. They include graduating an accredited medical school, passing a standardized national licensing exam, and completing at least one year of postgraduate training. Yet few people realize that private third‐​party certification organizations do the heavy lifting when it comes to quality assurance.

For example, I am a general surgeon. As a licensed medical doctor, I can legally decide to switch my specialty to obstetrics and gynecology or dermatology, or even psychiatry and display it on my door. However, health care facilities will not grant me practicing privileges without proof I completed postgraduate training in the specialty and will likely require board certification. Specialty boards will not grant me certification unless I complete accredited specialty training and pass their exams. Health plans will not include me on their provider panels without proof I completed the specialty training, and I will be unable to get malpractice insurance coverage for the same reason. Note how many independent, private third parties provide information and protection to consumers of already‐​licensed physicians. These are the real guarantors of safety.

The Republic report implies to readers that malpractice is automatically a reason to deny or revoke a license. Oftentimes, when medical or other professional malpractice cases are settled, the defendants do not stipulate liability. Both settlements and convictions get reviewed by licensing boards. But unless convictions are repetitive or egregious, boards rarely restrict or revoke licenses. The same is true when boards investigate complaints directly lodged by customers or patients.

Yet the authors of the report infer that something must be amiss if an applicant receives a universal license from a licensing board when they have a history of a malpractice settlement in the state where they are already licensed. If every malpractice settlement justified denying or revoking a license, the entire country would have a desperate shortage of doctors, dentists, and other health care practitioners.

Historically, it has been the incumbent members of professions and occupations who lobbied state legislatures to license and regulate them—not the customers, clients, or patients. While incumbents promoted licensing under the guise of protecting the public, they were really protecting themselves by reducing competition from new entrants and, in the process, inflating prices for their services. The report’s authors cite another organization that represents the interests of incumbents, the Alliance For Responsible Professional Licensing, that defends occupational licensing by saying “licensing helps to solve problems of income disparity, boosting wages most at the bottom end of skill distribution.” But that doesn’t account for the innumerable people who are locked out of the opportunity to lift themselves from poverty by using their skills to make an honest living.

For example, at one time Arizona required African‐​style hair braiders to spend nearly one year and close to $10,000 to get a cosmetology license, which includes training to use chemicals to dye or treat hair, as well as hair cutting. They’re taught nothing about hair braiding. A lawsuit pushed lawmakers to end that requirement in Arizona, but such obstacles to hair braiders still exist in several other states. Louisiana florists “protected” the pubic from people who want to simply arrange flowers by successfully lobbying for a law that requires them to get a license. License requirements include passing a four‐​hour exam during which the applicant must arrange flowers while being judged by licensed florists. Louisiana is the only state that licenses flower arrangers. Does the Federation of Associations of Regulatory Boards criticize Arizona for having less onerous requirements on flower arrangers who relocate from Louisiana? The Republic’s reporters didn’t say.

The proliferation of occupational licensing laws, from interior decorators to fire alarm installers, may have boosted the income of those protected by a license, but they have prevented many people from lifting themselves out of poverty by entering such fields of endeavor. Indeed, in 2016 President Obama’s Council of Economic Advisors issued a report detailing how licensing leads to higher prices and reduced opportunity. The Obama administration convinced Congress to appropriate grants to help states “enhance the portability of occupational licensing.”

In an earlier time, licensing laws were also used to exclude racial and ethnic minorities. The Cato Institute held a policy forum on this subject in November 2020 called “Race and Medical Licensing Laws.”

Furthermore, most state licensing boards deny licenses to people who have a history of a felony conviction. With nearly one‐​third of Americans these days having a record in the criminal justice system, licensing laws deny many people a second chance to better themselves. In May 2021 Governor Ducey signed into law HB 2067, which provides “Certificate[s] of Second Chance” to people convicted of certain felonies, which will help them obtain occupational and business licenses. The law does not apply universally to all crimes and convictions. For example, driving with a suspended license and criminal speeding are among the convictions excluded. Nevertheless, the new law at least helps some who’ve made mistakes in the past to clear the occupational licensing hurdle and forge a new and better life.

Arizona ignited a national trend in breaking down barriers to people of all backgrounds seeking to make an honest living while expanding options and choices for consumers. Universal licensing reform has bipartisan appeal. From blue states like New Jersey to red states like Missouri, lawmakers are uniting around the goal of removing the barriers to upward mobility that occupational licensing laws erect. Sadly, by citing irrelevant narratives, cherry-picking data, and failing to provide adequate context, the Arizona Republic article did this reform a great injustice.

*****

This article was published on January 2, 2022, and is reproduced with permission from The CATO Institute.