Bud Light’s Sales Implosion, Explained (by Mises)

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Estimated Reading Time: 4 minutes

I stopped drinking Bud Light decades ago, so when the Dylan Mulvaney controversy exploded last month, I didn’t need to consider if I’d stop drinking Anheuser-Busch’s most popular product.

What’s clear is that many others have decided to quit the beer over the brand’s decision to wade into transgender politics. According to figures reported in The St. Louis Dispatch, based on data from a Connecticut-based consulting group that focuses on the alcoholic beverage industry, Bud Light’s in-store sales fell 11 percent in the week that ended April 8 from the same period the previous year. Year-over-year sales fell even faster over the next two weeks, dropping 26 percent in mid April. The decline continued into May despite ad blitzes and marketing gimmicks that included $20 rebates—on a $19.98 case of beer. Oof.

Endless ink has been spilled over the controversy, which was fueled by celebrities like Travis Tritt and Kid Rock, who shot up several cases of Bud Light after the Mulvaney ads began to go viral.

Many public figures seemed genuinely stunned by what they saw as a massive overreaction to a single March Madness ad featuring Mulvaney, who drank from a Bud Light while talking cluelessly about the NCAA tournament.

“I thought there must be a piece of the story that I’m missing,” shock jock Howard Stern said on his show.

Writing at Vox, Emily Stewart poo-pooed the Bud Light controversy and predicted it would blow over, pointing out that similar campaigns directed at other major brands quickly fizzled out.

“In terms of hurting sales, boycotts tend not to be super effective as most people don’t respond, let alone stick to them,” wrote Stewart. “Remember the Great Keurig Boycott of 2017? Or Frito-Lay in 2021? Or, more recently, when people were mad because M&Ms were girls?”

Stewart might be correct that Bud Light’s problems will blow over, though I have doubts. Still, critics scratching their heads over the controversy have a point that there’s something fickle and disproportionate about it. After all, Jack Daniels, a brand with a consumer base similar to Bud Light, recently ran its own LGBTQ+ ad campaign featuring American drag queen Ru Paul, and it generated a fraction of the scrutiny. Miller Lite, meanwhile, ran its own “woke” ad that was ignored for months.

In a way, I feel sorry for Bud Light. The company is being singled out for doing the same thing other publicly traded companies are doing: catering to the ESG (environmental, social, and governance) puppeteers who are scoring them on “social responsibility.”

ESG scoring is notoriously opaque, but the costs of not playing the game are quite real. ESG funds managed some $40 trillion in assets as of 2022, according to Bloomberg, and a poor score can get a publicly traded company booted from a fund just that fast, as Tesla found out that same year when it was kicked off the S&P 500 ESG index despite its sparkling sustainability score.

“While Tesla may be playing its part in eliminating fuel-powered cars, it has fallen behind its peers when examined through a broader ESG lens,” said Margaret Dorn, the executive in charge of ESG scoring for North America. Dorn didn’t feel it necessary to elaborate further.

Unsurprisingly, companies are not thrilled about having to do this ESG dance. While they pay lip service to ESG publicly, a 2022 CNBC survey showed most CFOs supported efforts to prohibit pension funds from using ESG scoring to determine how they invest.

One can see why corporate executives chafe under the ESG framework. Instead of focusing on creating value and serving consumers, companies are forced to dance to the ESG piper’s tune and perform whatever social initiatives a tiny cabal of people regard as important.

This was always the danger in “stakeholder capitalism,” the decades-old attempt to nudge corporations into serving interests other than their own shareholders and consumers. It subordinates consumers, the very people who should be in charge.

“The real bosses, in the capitalist system of market economy, are the consumers,” the economist Ludwig von Mises famously wrote in his book Bureaucracy. “They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality.”

This is the true lesson of “Bud-lash.” Bud Light forgot who its bosses really were. It wasn’t just that Bud Light was serving the ESG puppeteers—who award companies points for diversity and inclusion initiatives as well as environmental ones—and ignoring its own consumer base. The company was openly insulting its consumer base, describing Bud Light as a “fratty” beer and “out of touch” brand “in decline.” It’s one thing to disregard your boss. It’s another thing to openly insult her.

Many see Bud-lash as “anti-trans,” but the response is more about reminding corporations who their boss really is: consumers. These are the true masters in a free market economy; they decide who wins and loses, who becomes rich, and who becomes poor. And yes, consumers are fickle.

“They are no easy bosses,” Mises reminds us. “They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them, nothing counts more than their own satisfaction.”

Bud Light was serving a boss other than its consumers, and it really shouldn’t have to. “ESG is a scam. It has been weaponized by phony social justice warriors,” Elon Musk wrote on Twitter after Tesla was given the boot from the S&P 500 ESG index. 

Musk is not wrong. ESG is a scam and a dangerous one. It is embraced by anti-capitalists precisely because it undermines the consumer sovereignty Mises described, and empowers the financial class, bureaucrats, and central bankers by enabling them to manage society as they desire while further enriching themselves.

A famous ancient text says, “No one can serve two masters.” Corporations like Bud Light need to remember who their true bosses are, and it’s past time consumers reminded them.

*****

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

Trump and His Allies Attack Tax Reform

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Estimated Reading Time: 8 minutes

Recently we felt it necessary (Trump Is Out of Line) to slap down President Trump for his attacks on Ron DeSantis in relation to Medicare and Social Security.  We contended that no serious effort at controlling the deficit can be undertaken with the reform of “entitlement” programs.  The reason:  that is where the overwhelming bulk of the money is spent and these systems are demographically flawed.  If you truly want to deal with deficit spending, entitlement reform must be discussed.

Now we must slap him once again over his attack ads about DeSantis voting for the “Fair Tax”, while a member of Congress.  The Fair Tax is a plan to replace the income tax and the IRS with a fairly simple national sales tax.

For some reason, Trump has decided to run to the Left of Governor DeSantis on key issues.  We see this with entitlement reform, Covid lockdown and vaccinations, Disney and corporate “wokism”, abortion, and now tax reform.

The TV ad that you can view below is misleading to the point of lying, which is beneath the former President.  It mentions the expected 23% sales tax and fails to mention it replaces the income tax.  No Conservative is going to vote for a national consumption tax without eliminating the income tax.  Trump makes it sound as if DeSantis wants both at the same time, a flat-out lie.

The Fair Tax idea has been floating in Conservative political circles since at least the mid-1980s.  It was advocated by Bill Archer, a Congressman from Texas who became head of the House Ways and Means Committee in the mid-1990s.  Archer was an advocate of what at the time was called “starve the beast”, a theory that we could only stop the rise of the leviathan government by eliminating the income tax and thus restricting the flow of money.

Even moderate Republicans such as Senator Richard Lugar, supported the idea.  This is not a wild and crazy idea hatched by Governor DeSantis.

It reportedly even came up recently during the fight amongst Republicans for House Speaker.  Apparently, some would not support Speaker McCarthy unless he pledged to let the Fair Tax out of committee and allowed an up or down floor vote.

So, Trump’s attack on DeSantis not only is unfair to his chief rival (why do you think he singles DeSantis out for abuse and not others) but he does a grave injustice to the idea of the Fair Tax.

There are several iterations of the Fair Tax but rather than get into the technical weeds, let’s look at the broad outlines of its appeal.

First of all, the income tax has always been a product of the Left.  Plank two of the 1848 Communist Manifesto calls for “a heavy progressive or graduated income tax”, and that idea has been a mainstay of socialist thought since.  The idea was to use the mechanism of the state police power to redistribute income to create income equality.  Morally, the Maxists said the more a man rises above the level of subsistence, the less claim he has on his output.  Why is that?  Because Marx said so.

Forcible redistribution of wealth is not something Conservatives or Libertarians should accept.  Why does Trump support a plank out of the Communist Manifesto?

The purpose of the tax system should be to raise revenue for the government efficiently and grow the economy while protecting the individual rights of its citizens.  The tax system should not be used as a tool to impose one particular view of mankind by force and compulsion.

If you don’t think the government is force, just try not paying your income taxes.  Try running a business without withholding taxes on employees.

The US largely ran for many years on excise and consumption taxes, revenues from land sales, and tariffs.  In those years, we had a smaller government and it was not in the business of income redistribution.

It is doubtful the Administrative State could have arisen without the compulsory aspects of the progressive income tax and that is why it came as part of the Progressive package under Woodrow Wilson, which also included the Federal Reserve and the direct election of Senators.

The Fair Tax repeals the 16th Amendment and eliminates the IRS as we know it.

Some Conservatives have supported a Flat Tax, basically a flat income tax.  There is much good in that idea too but since it leaves the IRS and the Income Tax both in the statutes and as an Amendment to the Constitution, there is nothing to say a progressive tax won’t simply grow back.  We have seen a version of that over the years with 5 tax brackets, then 3 brackets, taxes as high as 90%, the Alternative Minimum tax, and so forth.  The income tax is always morphing and is always a tool for politicians and the special interests that fund them.  The same can be said for the corporate income tax.

The only way to kill the Income Tax is to totally replace it, which the national consumption tax would do.  That also eliminates the estate tax and capital gains taxes, the alternative minimum tax, the corporate income tax, taxes on dividends, and interest.  The government would instead be funded by a simple tax collected at the final point of consumption by a consumer.

An important feature of consumption taxes is that they are self-regulating while income taxes are not.  Right now, the level we all pay in taxes is in the hands of politicians, special interests, and government administrators.

Writing in the Federalist Papers, Alexander Hamilton noted: “It is the signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess.  They prescribe their own limit, which cannot be exceeded without defeating the end proposed, that is an extension of the revenue…this forms a complete barrier against any material oppression of the citizens by taxes of this call, and is itself a natural limitation of the power of imposing them.”

So, Mr. Trump, are you for the tax system of Karl Marx or Alexander Hamilton?  Are you for self-limited taxation (limited by the consumer or citizen) or limited by politicians and bureaucrats?

Look at how abusive politically speaking the IRS has become.  Whether it be trying to ruin Conservative organizations under Lois Lerner or recently invading the privacy of journalist Matt Taibbi, the IRS has been used from its inception to attack political enemies.  Lyndon Johnson used the IRS against enemies and so did Richard Nixon.  It is not a matter of partisan abuse alone, it is a violation of the rule of law.

And why, as Open the Books has found, does the IRS need millions of rounds of ammunition and over 2,000 agents trained in the use of deadly force?

Would not it be a net plus for liberty to eliminate the system that gave rise to this abusive organization?

And then there is the cost.  Estimates vary, but the burden on the economy to comply with income taxes goes well beyond the bloated budget of the IRS.  Think of what you have paid over the years for accountants and CPAs.  How much time do you spend keeping records and shuffling paper? That is the real cost of the current system.

And how about simplicity and the time spent to understand the code? Really, should we have to consult a priesthood of lawyers and accountants just to pay our taxes?

The IRS code runs more than 70,000 pages, and the most recent Fair Tax legislation, about 130 pages.  Not only must we deal with the IRS code, but there are many more pages of court cases and administrative rulings.

And then there is the cost on business to comply, which is simply passed on to the consumer in the end.  Complying is simply a cost of doing business and will be embedded in all costs and those costs cascade or get added to each other much like railroad cars in a train wreck.  Commodity producer A pays taxes and regulatory costs, to provide a product to processor B who pays taxes and regulatory costs, who move the product to manufacturer C who pays taxes, who then delivers to transport company D which pays taxes, then delivers to retailer E, who pays taxes, to sell to you, who pay for sales taxes on the end product, and income taxes on the money you use for the purchase. Perhaps worse it is hidden and you are not even aware of it.

Everywhere along the chain, there are compliance costs and taxes paid that get surreptitiously added to the cost of products we all buy.  In fact, estimates are it costs about $1 in compliance costs for about every $4 collected in revenue.

But even that does not come close to the actual cost, which is hard to know because much of the cost is never recorded.  It is the cost of actions NOT taken or actions taken that are not productive. For example, if you decide not to sell an investment because you will pay capital gains tax, you may be making a decision that has nothing to do with the best and highest use of your capital, but simply to avoid taxes.  Contrarily, if you purchase municipal bonds to avoid taxation on income, that may not be the highest and best use of the capital either for your family or the economy.  How much do such decisions cost productivity because the tax tail is wagging the entire dog of the economy?

Productivity is what drives our standard of living.  You reduce productivity and you reduce our standard of living and nobody knows by how much or why.  What a system!

The only people who benefit from such economic and capital distortions are politicians and tax lawyers.  The rest of us don’t.

And finally, there is the politics of the thing and civic education.  Do you think for a moment the voters would buy into “the rich are not paying their fair share” if they really had any idea of who pays taxes in this country and what their true level and administrative costs really are?

One really nice feature of the Fair Tax is it eliminates all the web of hidden taxes, withholding taxes, excise taxes,  and other gimmicks used to obscure the true cost of government and makes it simple and upfront.  When all these taxes and compliance costs are cascading through the cycle of production and consumption,  how could you possibly know what you really are paying in taxes?

With the fair tax, it is on the receipt for the purchase of final consumption.

If citizens really knew how much they were paying to the government,  would they feel the same way about the government?  Would they be so casual about the immense waste?

And we would further submit, no one getting benefits from the government should not know the cost and be free from some of the cost.  If people don’t feel the sting of the cost of some of the things they want from the government, they will make endless demands.  Why not if you can get benefits that are paid for by someone else?  No, everyone needs to pay something and every citizen needs to know the true cost of government.   That is indeed the true meaning of  “fair share.”

In short, our current tax system needs to be fundamentally reformed.  We need a tax system that removes Marxist philosophy from the process, is efficient and simple, and allows the ultimate level of taxation to be determined by consumers.  Getting rid of an abusive agency and a tax code that is longer than the Bible is an added benefit.

There is much to like about the Fair Tax.  If you want to learn more, here is a website to get started.

Imagine a world without the IRS, where there are no taxes on investments and savings.  April 15th would be just another day. No year-long effort to keep records. Imagine the capital accumulation and increase in productivity.  Imagine a smaller, less intrusive government.  Imagine a higher standard of living.

The ultimate point of our criticism of Mr. Trump and his PAC is that they have reduced quite a serious problem for the economy and liberty, to a tacky song and misleading attack ad on a political opponent.  

The Fair Tax has its problems and its critics.  But, like its sister the Flat Tax, at least it is a serious attempt to mend a broken, expensive, uneconomic, and abusive system.  It is exactly the type of thing that should be debated among candidates.

In this argument, we think those that wish to reform the progressive income tax and the IRS, have the upper hand.

 

 

 

Without Economic Freedom, None of the Others Matter

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Estimated Reading Time: 4 minutes

[One Fine Spring Day, Over the Phone…]

“Oh, and by the way, your background check says there’s a warrant out for your arrest.”

This is not, mind you, the kind of thing one expects to hear updating teaching credentials in a very staid University bureaucracy. Nevertheless, there it was.

“Oh?,” I retorted, a bit stunned. “Anything indicating why?”

“It says something about a zoning infraction?” the all-too-chipper HR Department lady replied.

“I’m sure it will be fine—it’s no issue for us, but we thought you might like to know.”

Why yes, yes I would.

It turns out that my little experiment in entrepreneurial civics had gone horribly wrong, and I was one short step away from spending time in the clink. I had, you see, committed the jailable offense of putting up a tent.  On my own land.  Without permission from the State. I won’t rehash the details but feel free to get the skinny here.

The long and short of it is this: our county sent us a nastygram some time back informing us that our AirBnB platform tent was strictly verboten without first going through the labyrinthian protocols of special use exemptions, business licensing, and building permits. We dutifully took the listing down and began the unconscionably dumb process of doing it the “right” way — Site Plan Reviews, public meetings, fights with a water district that wanted us to buy a water meter for a tent with no plumbing, the whole deal.

That all was bad enough, but somewhere along the line, a local county zoning official acting on the basis of an “anonymous tip” referred our case to the prosecutor’s office because she had been “told” we were still operating in contravention to guidelines.

I called her up.

“Can you confirm that there is an open arrest warrant in my name, on the basis of a zoning violation?”

“That is correct sir.”

“Are you telling me that I could be stopped at any moment and incarcerated, that I would be arraigned for a tent infraction?”

“Yes, sir, we have policies which you have not conformed to.”

“But didn’t I tell your office personally that we have taken the listing down, and haven’t we been working diligently with your own staff to get this thing resolved? Aren’t you even now reviewing the oodles of forms, maps, and requests we sent you?”

“Yes sir, but we were told you were still operating the tent as a rental, which means you are still in noncompliance.”

“Told by whom?”

“I can’t relay that information, sir.”

Ah. I see.

**Spoiler Alert**

I’m not writing this from a Platte County prison cell. It turns out that petty official X just needed to hear me say that I wasn’t breaking their rules, and she would call the prosecutor’s office and have the warrant rescinded based on “proof of compliance” or some such.

Everything, just as University Human Relations predicted, is “fine.”

Except that it isn’t.

There are two issues at stake here.  The first, of course, is a flagrant yet ultimately trivial matter of basic professionalism and due process — Platte County clearly has some deep house cleaning to do. But it is tangential to the much larger matter, which is that the bureaucratic indiscretions on display here can only occur in an administrative system that weaponizes regulations to consolidate power. This overregulation, in turn, is the inevitable outcome of our collective giveaway of rights to the forces of “planning,” “safety,” and “zoning.”

We have a real crisis on our hands in the form of basic property rights arrogation. In an age of “epic crisis,” it’s difficult to know which looming threats are real and which are hyped fantasy, but this one surely tops the list, if for no other reason than that it is so subtly devious: zoning rules have been quietly adopted nationwide and have led inexorably to administrative despotism and bureaucratic sclerosis. This isn’t just irritating red tape, it is a reflection of basic freedom lost.

Ludwig von Mises properly noted that economic freedom undergirds the rest of them:

Government means always coercion and compulsion and is by necessity the opposite of liberty. Government is a guarantor of liberty and is compatible with liberty only if its range is adequately restricted to the preservation of what is called economic freedom. Where there is no market economy, the best-intentioned provisions of constitutions and laws remain a dead letter.

And indeed, economic freedom has been dragged into the deep end by the dead hand of zoning restrictions. For a citizen to be forbidden from such a simple economic act as offering a tent for rent on his own land means that state administration has metastasized into an all-encompassing prohibition on economic activity more generally. Forbidding entrepreneurial ventures that have not been granted prior approval and design review by unelected officials is, practically speaking, state ownership of the means of production. This has enormous implications not only for the economic outlook of our nation, but for the broader freedoms it prides itself on.

The United States is on a precipitous plunge into the inky waters of a command economy. We have fallen from the top-tier of economic freedom indexes to 25th in just a few short years and the trend is getting worse. To fix this, it is high time to repeal vast swaths of local zoning laws and recover our rich heritage of Life, Liberty, and Property.

*****

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

Fed’s Favored Core PCE Price Index Re-Accelerates, Driven by Services, Motor Vehicles: Inflation Stuck on High, Shifts from Item to Item

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Estimated Reading Time: 2 minutes

Not encouraging: core PCE price index refuses to come down, and has moved sideways since July last year.

The inflation index favored by the Fed, the core PCE price index – which, by excluding the food and energy products, is a measure of underlying inflation – re-accelerated in April, as services inflation re-accelerated back into the red-hot zone, and as durable goods prices rose, after falling for months, driven by a jump in motor vehicles and parts.

Inflation is just churning from one product category to another, falling here but popping up again over there like the arcade game of Whack A Mole. And so the core PCE price index continues to be stuck near the 5% level when the Fed’s target is 2%. And the Fed uses this core PCE index as yardstick.

On a year-over-year basis, the core PCE price index jumped by 4.7%, same as in July 2022, and up from a 4.6% increase in March, according to data from the Bureau of Economic Analysis today. It has now gone sideways at just under 5% for nearly a year, and is not coming down, but is only shifting from category to category.

Inflation in services re-accelerated in April from March, driven by spikes in insurance and financial services, and “other” services such as personal services, and big increases in healthcare and housing costs.

Inflation is particularly difficult to wring out of services, but services are where the majority of consumer spending ends up: healthcare, housing, utilities, education, travel, entertainment, restaurant meals, streaming, subscriptions, broadband, cellphone services, etc…..

*****

Continue reading this article at Wolf Street.

What’s Next for the Fed?

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Estimated Reading Time: 3 minutes

After neglecting to address inflation throughout 2021 and into 2022, the Federal Reserve has now raised its interest rate targets 10 consecutive times, to the highest level since 2007.

At his press conference to announce the change, Fed Chair Jerome Powell emphasized the Fed’s priority of reducing inflation and stressed that the Fed will maintain high interest rates as long as is needed to achieve this goal.

Given the turmoil in the banking system and softening of the labor market, is the Fed likely to fulfill this commitment? What factors might cause the Fed to revise its monetary policy?

Will interest rates remain elevated? Powell has repeatedly stated that the Federal Open Market Committee (FOMC), which determines the stance of monetary policy, has no plans to cut interest rates in the current year. Several FOMC members, however, have expressed views that the committee should pause its rate hikes for now to evaluate the effects of its recent policy changes.

While not committing to a pause, Powell pointed out the FOMC had removed from its new monetary policy statement a note in previous statements that “some additional policy firming may be appropriate.”

One reason for Powell’s emphasis on keeping interest rates high is his fear that if the public believes the Fed will cut rates, then they will expect more inflation, and that change in expectations could actually cause inflation to rise. The FOMC must signal that they are willing to keep rates high since their priority, at least for now, is to stamp out inflation.

What are market participants expecting? Despite Powell’s insistence that the Fed has no plans to reduce its interest rate targets, it appears that financial market participants do not believe him. Financial markets indicate that the Fed is expected to stabilize interest rates through the summer and begin cutting in the fall. This might happen for one of two reasons.

First, the Fed’s ideal scenario is that inflation continues to slow, in which case, they could reduce interest rates slightly to what they consider to be the “normal” range with little negative side effects to the economy. Falling inflation implies an increase in real interest rates, so the FOMC may need to reduce interest rates in order to maintain a neutral policy rather than becoming overly restrictive.

Second, most economists are predicting a recession this year. If it happens soon, the Fed will be stuck with two bad options: either keep interest rates high to prevent inflation or cut interest rates to address the recession. Given the Fed’s history and Powell’s past reluctance to address inflation, the markets may be betting on the latter.

What will determine the Fed’s decisions? Chair Powell said that, going forward, the Fed will be data dependent in its monetary policy decisions. Three important factors they will likely consider are inflation, unemployment, and the prospect of further bank failures.

The Fed is hoping inflation, and especially inflation expectations, will continue to fall. High inflation has been harmful to average Americans, and getting it down has become the Fed’s top priority. Falling inflation would give the Fed more room to cut rates without pushing up expectations.

Employment remains strong but may be slowing slightly, which is fine since the Fed wants it to calm to a sustainable pace. If unemployment rises substantially, indicating a likely recession, it is not clear how the Fed will respond, especially if inflation remains high.

Despite the negative effects of high interest rates on the banking sector, the Fed is reluctant to lower rates for fears of perpetuating inflation. It has sought to address banking problems with emergency lending facilities rather than through monetary policy. That has worked so far. If more bank failures threaten the financial system or put the economy at risk of recession, however, the Fed may choose to reverse course and lower interest rates to address these issues.

The economy is stable for now with low unemployment, falling inflation, and interest rates expected to remain stable, at least for a while. A wide range of outcomes are still possible for 2023, ranging from stagflation to a “soft landing.” The Fed’s response to economic conditions in the coming months may tell us which of those outcomes is most likely.

*****

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

Market Volatility Compresses As Debt Ceiling Looms

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Estimated Reading Time: 5 minutes

Volatility in stock, bond, currency, and gold markets continue to contract as they pause awaiting not only the next meeting of the Federal Reserve but also the resolution of the current political battle over the debt ceiling.

Depending on who is doing the talking, and what “extraordinary measures” are used by the US Treasury to shuffle money around, the US government will be close to running out of money in the next week or so.

Markets appear to act as if this threat is mostly political theatre, as none of the major markets are currently acting as if the US is really about to default on its sovereign debt.

For example, if the markets truly thought the US would not be paying interest on US treasury bonds, which is the reserve asset of the world as well as our own banking system,  Treasury bonds should be falling sharply in value, discounting that these bonds could become worthless.  Falling bond prices would translate into sharply higher interest rates, since the price of a bond and its yield, are mathematically connected at the hip. Such a collapse in price would harm everyone who owns them, which is most of the world.

Bonds, however, are only drifting gently lower right now.  However, their decline over the past year is largely responsible for our serious bank failures of late.

Likewise, the value of the dollar should be falling sharply, roiling international trade and banking as well.  That is currently not happening either.  The dollar has been drifting lower of late but recently has bounced back up a bit.  If we simply start to print money to pay all of our bills, that can hardly be expected to help the value of the dollar.

If the “reserve” of the international banking system were really about to default, then one would expect gold prices to be rising sharply.  They aren’t. Gold, of course, is the only recognized international reserve, not an obligation issued by a government, and hence, can’t default.  But of late, its price has been drifting lower, not rising in concern.   Having fallen just $4 short of an all-time high in early May, it has meandered down from about $2,060 per ounce to about $1,960 per ounce as we write.  This $100 dollar slide would seem an odd thing to do if the US were really about to default.

And stocks would hardly be comfortable with a default if that were really about to be the case but their action has been mostly sideways with contracting volatility.

Thus, it would seem the markets are sanguine about how the debt ceiling talks will end up.  The markets apparently feel that once again we will see some kind of resolution before it is too late or we will have selected shut down of some government agencies as we have seen before.  Closing the National Parks or Passport control is surely inconvenient and damaging to communities that need tourism, but such closures will not wreck the country.

The markets have had to go through this process several times before, and depending on the severity, and how “default” is handled, will dictate the extent of losses and the time necessary to come back from those losses. The last big debt ceiling crisis was in the summer of 2011.  It created several weeks of volatile action in the markets, including a decline in stocks of about 21%.  Afterwards, markets continued their advance which lasted for several more years.  However, the US government suffered its first bond rating downgrade and lost its AAA rating with Standard&Poors with a “negative outlook” going forward. 

There was another disturbance in 2013 that was milder.

There are both good and bad in the market’s reactions to these present events.  The good news seems to be that markets just don’t believe that our political leadership is that stupid and that most of this is political brinksmanship designed to extract concessions from the other side.  There are other things to worry about such as the FED interest rate policy, declining economic growth, and earnings reports softening.

The bad news comes on two fronts.  Firstly, the markets are quite unprepared if talks truly run off the rails and the US has to default in some form.  If you are unprepared,  when reality reveals itself it can lead to rapid panic. Secondly, the two arguing parties might feel greater urgency to solve the problems if the markets were putting them under pressure. The current sideways action just will not be sufficient to catch the attention of our camera-seeking political leaders.

History suggests that what damage is done will be temporary, assuming all other market factors are reasonable.

However, a true default could be much worse and more long-lasting.  Then again, getting spending constraints would be a positive for the markets and the economy.

The long-term problem is the current huge build-up of deficits is unsustainable. We cannot keep racking up deficits like this.  Spending is far outpacing both economic growth and revenues and the trend seems permanent.

Current Republican leadership knows this and also feels this time, as opposed to previous times, the debt ceiling crisis will be blamed on the Democrats. Current polling does show the public largely supports the Republican plans to trim spending. All that is being asked are quite modest cuts in spending and the return of unspent Covid relief money. They are quite willing to sign on to a debt ceiling increase if some modest common sense things are done.

The Democrats for their part are now a radical party and turmoil serves radical political ends.  Some of their most progressive members are now suggesting street violence. For most of the last few months, the Biden Administration flatly refused to even talk to the Republicans knowing full well the end date was coming soon.  Then they tried trotting out a strange 14th Amendment Theory.  The section of that amendment had to do with integrating the previous states of the Confederacy back into the Union and making it clear,  the Union would not be responsible for Confederate debts. The position that this applies to the current circumstance is absurd on its face and one only a constitutional ignoramus could make.

Other novel theories suggest money once appropriated by one Congress is binding on the debt management of another Congress.  But if acts of one Congress of one party are an unquestionable obligation of another Congress run by another party, nothing would ever change.  That is not the way the system of checks and balances works. Democrats remain convinced they can blame the “crisis” on the Republicans but their desperation indicates that Speaker McCarthy has them and the President cornered.  They seem to feel there are no problems always spending more than you take in. The bogus nostrums of Modern Monetary Theory seem to have taken up permanent residence in the Democrats’ brains.

Both the market complacency and the view that this is just another period of political brinksmanship do seem to miss the serious nature of what we are dealing with.

We really can’t go on like this as a nation.  The debt burden is now way beyond political posturing. Not that far in the future, the laws of economics will apply to the US just as it has to other countries.  We are already in the worst inflation we have suffered in 40 years, an indication we are closer to the breaking point than many think.  We are having a rolling banking panic and we are not even in recession.  If we nose into recession later this year, revenue will fall (it already is) and expenditures will rise, making the deficit widen once again.

Other great empires have been brought to their knees by financial calamity and both citizens and markets, become collateral damage to government financial mismanagement.  Who is to say we are so special as to avoid the consequences of spending forever more than we receive in revenue?

No, we need some sober leadership that gets expenditure and revenues back into balance.  However, financing this great country with such chaotic procedures is a burden on all of us and very difficult for the markets to figure out.

The great leader that unified Germany Otto von Bismark is credited with this pithy observation: “There is a Providence that protects idiots, drunkards, children, and the United States of America.”

We worry about how much longer that may be true.

 

 

 

 

Crowding Out: The Fed May Be Killing the Private Sector to Save the Government

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Estimated Reading Time: 2 minutes

The Federal Reserve’s balance sheet reached its all-time high in May 2022. Since then, it was supposed to drop at a steady pace and shed three trillion US dollars by 2024. The normalization of monetary policy was built on the idea of a soft landing for the economy. However, the Fed may be killing the private sector to save the government.

Curbing inflation requires a significant reduction in the money supply and aggregate demand. However, if government deficit spending is left untouched, the entire burden of normalizing monetary policy will fall on families and businesses.

The current situation is the worst possible. The Fed’s balance sheet is not falling as fast as it should; government spending has not even been scratched, but the money supply is falling at the fastest pace since the 1930s, and rate hikes are hurting the productive economy while the government seems unaware of the need to reduce its bloated budget.

The first-quarter GDP figure is extremely concerning. Government spending showed yet another big rise at +4.7 percent, much higher than expected. However, consumption, at +3.7 percent annualized, was well below estimates and driven by a worrying new record in credit card debt. Even more concerning, gross private domestic investment fell by a massive 12.5 percent.

There is robust evidence of a negative trend in the real economy. Rising federal expenditure, more bureaucracy, higher taxes, and weaker activity in the part of the economy that drives growth and jobs.

Rate hikes have two direct negative effects on the economy if the government does not reduce its deficit spending spree. They mean higher taxes and a massive crowding out of available credit. The government deficit is always going to be financed, even if it is at higher rates, but this also means less credit for businesses and families. The crowding-out effect of the public sector over the productive economy means lower productivity growth, weaker investment, and declining real wages as the government keeps inflation above target by spending additional units of newly created currency, but the productive sectors find it harder and more expensive to find credit. Additionally, the government borrows at a much lower cost than even the most efficient and profitable businesses.

It is impossible to achieve a soft landing for the economy when the Federal Reserve ignores the signals of the banking system and the real economy. The first pillar of a true soft landing must be to preserve the real disposable income of workers and the job creation and investment capabilities of businesses.

When the government continues to increase spending, there is no signal of the mildest budgetary control, and the entire “landing” comes from the private sector, what we get is upside-down economics.

The Federal Reserve has stopped paying attention to monetary aggregates just as the money supply is contracting at an almost historic pace. Even worse, the money supply is contracting but federal deficit spending is untouched, and the debt ceiling was raised again.

The money supply is collapsing due to the inevitable credit crunch and the difficulties faced by consumers and businesses. It is impossible to grow with rising taxes, persistent inflation—a tax in itself—and carrying the entire burden of the normalization of monetary policy.

Fighting inflation without cutting government spending is like dieting without eliminating fattening foods.

*****

This article was published by the Ludwig von Mises Institute and is reproduced with permission.

Home Sales Plunge, Supply Rises, Prices Drop Year-over-Year Most since 2012. Even Investors Pull Back

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Estimated Reading Time: < 1 minute

All-Cash sales plunge 22% as investors don’t feel like overpaying either. The 2023 version of the spring selling season is here.

 

OK, it’s spring selling season, the famously best times of the year to sell a home, because that’s when prices rise and sales rise due to hot demand from home buyers who were hiding out in the winter. But this year?

The median price of all types of previously owned houses, condos, and co-ops whose sales closed in April fell year-over-year by 1.7% to $388,800, the third month in a row of year-over-year declines, according to the National Association of Realtors. A debacle we haven’t seen since February 2012, when the market emerged from Housing Bust 1. From the peak last June, the median price declined by 6% (historic data via YCharts):

For single-family houses, the median price fell 2.1% year-over-year, the third year-over-year decline in a row, to $393,300. For condos, the median price still ticked up 0.7% year-over-year, to $348,000.

But it’s still spring selling season when prices always rise from one month to the next. Even during Housing Bust 1, the median price often rose month to month during spring selling season, and sometimes by quite a bit. And the median price in April was up from March, but that increase was smaller than the increase in April 2022 (+4.3%). Hence the larger year-over-year decline (historic data via YCharts):

Sales of all previously owned homes fell by 3.4% in April from March, to a seasonally adjusted annual rate of sales of 4.28 million homes, solidly entrenched in the dismal levels of Housing Bust 1……

*****

Continue reading this article at Wolf Street.

A Book to Help Young Americans Understand Economics: Economics in Action by Brian Balfour

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Estimated Reading Time: 5 minutes

Very few young Americans learn anything about economics. Some high schools offer it, but the courses are usually taught by teachers who have scant knowledge of the field, using books that are heavily laden with anti-market sentiments. Such books reinforce socialistic ideas about worker exploitation, the supposed instability of capitalist economies, the need for governmental welfare systems, and many other interventions. The seeds of hostility towards economic freedom are planted in those classes, as well as in many others high school students take.

Then, in college, the economic myths and misconceptions learned in high school are apt to be reinforced, even if the student takes an economics course. The typical college Econ 101 course is rooted in Keynesian analysis and is rife with discussions about market failures that only government action can supposedly solve. This steady exposure to, as Ludwig von Mises called it, the anti-capitalist mentality, helps to explain why so many young Americans say they would prefer to live under socialism.

Clearly, we need better teachers and better textbooks.

Here is some good news in that regard. Thales Academy, a network of private schools that began in Raleigh, NC and has spread into South Carolina, Virginia, and Tennessee, has developed and published a textbook for use in its high school economics course entitled Economics in Action. The book was written by Brian Balfour, Senior Vice President of Research at the John Locke Foundation, and it is written from the Austrian standpoint. That is to say, it is rooted in the thinking of Karl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises, and other economists (whether actually from Austria or not) who emphasize that the understanding of economics must begin with the logic of individual action.

Balfour patiently explains to students that the laws of economics derive from the fundamental point that human beings only act when they believe that doing so will make them better off. That is the basic axiom from which the entire discipline flows. Economics is thus a science of reason, not of statistics. It is open to everyone, not just those who are comfortable with abstruse mathematics. You won’t find any equations in the book, just clear, persuasive English.

One of the first and most important lessons that readers of Economics in Action will grasp is that only individuals act. We often hear that “the economy” is behaving in a certain way, like “sluggish” or “overheated,” but Balfour explains that such notions are misleading. When we speak of “the economy” we are talking about the great network of individuals who produce and trade, not a thing capable of action on its own.

In their decision-making, individuals are constantly faced by scarcity. There are limits on time and the resources available. Therefore, people must choose carefully, making the trade-offs that best suit their own circumstances and values. The millions of people who comprise “the economy” are guided in their choices by prices and opportunity costs (the most valuable option that must be given up to do something else). The book explains how prices come about as a natural consequence of the basic axiom — people trying to make themselves better off — and how trade will occur if and only if the trading partners think they will both gain. The picture that emerges for students is that order comes from the millions of individual actions, an order that no one planned or needs to direct.

Seeking to make themselves better off, people naturally tend to specialize in whatever they do best and trade with others to obtain goods and services that they couldn’t produce efficiently for themselves. The resulting division of labor is a crucial part of the spontaneous economic order, one that the book shows is vital to prosperity.

Also vital to prosperity is entrepreneurship. Balfour explains to his readers that when individuals see opportunities for profit that others have not, they can earn a lot for themselves by assembling the resources necessary to produce the new good or service. If their vision turns out to be accurate and consumers really do want the product, they will make profits, which are usually reinvested in the business to expand output. But if the entrepreneur is mistaken, the result will be losses, indicating that he has wasted resources. The important point here is that economic liberty encourages people to look for improvements, rewarding them if they’re right.

Some students might be thinking that this free market system sounds good, but couldn’t it be made better if the government stepped in to accomplish certain desirable goals?

Economics in Action has the answer to that question: No.

What if the government tossed out the system of private property and liberty in favor of socialism? Large numbers of Americans profess that we’d be better off because socialism is more “fair.” Balfour makes it clear that socialism necessarily means enormous waste of resources, because it lacks a price system. Not only that, but socialism leaves little or no room for entrepreneurship, so progress would grind to a halt.

Well, what if the government were to try to help poor workers by demanding that employers pay wages that are higher than the levels that prevail in the market?

In his chapter “Interventions in the Market,” Balfour explains why all varieties of government interference with the natural economic order will have undesirable effects. Minimum wage laws prevent some workers from being able to find jobs (at least, legal ones); maximum price laws inevitably cause shortages in the market and impede the increase in production that’s needed; laws against “price gouging” after natural disasters make things worse by driving away profit-seeking individuals and companies that want to sell badly needed goods and services. Furthermore, taxes interfere with the functioning of the market by diverting resources away from the uses that would be dictated by competition and into the projects desired by politicians, projects which are often wasteful or even counterproductive.

The book also devotes many pages to a discussion of money. Students learn how money comes into existence as a highly valued commodity that most people willingly accept in trade. Gold emerged as the ideal money, although other items have also served as a medium of exchange. The problem begins, Balfour shows, when governments take over the production of money, moving away from commodity money (such as gold) and replacing it with fiat money. Fiat money is not backed by any actual value and governments can (and almost inevitably will) produce more and more of it so they can pay for their expenses.

When they do that, the result is inflation. Most Americans think that “inflation” means generally rising prices, but Balfour correctly states that what is actually being inflated is the supply of money. One of the consequences of doing that is generally rising prices, as the value of each unit of money decreases. But that isn’t the only consequence. Another is the boom-and-bust business cycle, which results from the way governments artificially depress interest rates through their central bank operations.

Balfour concludes with a chapter on economic fallacies. He explains why labor-saving devices are not a “curse,” but instead are essential to an increasing standard of living; why government programs to “create jobs” are worse than useless; and why it’s a mistake to think that the rich get rich at the expense of the poor.

Who should read Economics in Action? I would say that it should be read by anyone who desires to grasp the truth about economics — students and adults. But focusing on students, I would recommend that parents who want their children to be part of the solution, rather than part of the problem, should get this book for them.

Homeschooling parents will find that the book does a superb job of covering the basics and getting their children to think sensibly about economics. Parents who have children in schools might want to get this book for them as a supplement to the materials they will receive if they have an economics class — materials that will probably be full of falsehoods and disinformation. Countering the plague of economic falsehoods and disinformation that statists constantly spread is crucial to our liberty, and this book does so brilliantly.

*****

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

Receiving Found Money

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Estimated Reading Time: 3 minutes

During my morning routine prior to work, I was taking a break when the phone rang. At the other end was a gentleman telling me he had found money for me. From there my day changed.

I sat up and listened. Who wouldn’t? I am getting free legal money not handed out by a loathsome politician acting like it was theirs in the first place. Of course, it was my money, but it was still a find.

The call was from Bernstein, a private wealth management firm. I left there about five years ago when my financial advisor departed unannounced. I promptly moved my accounts elsewhere. It certainly was possible that some earnings/dividends might have been transferred to them after my departure. At any rate, it was nice to hear they had some of my moola.

The young man then proudly told me they were sending me a check for 11 cents. Yes, you read that correctly. They had contacted me because they were holding 11 cents of my money to be deposited into my IRA account. He wanted to know if he should send it to me or to my new investment advisor.

Then I started to harangue him. “You didn’t really contact me about 11 cents, did you? No, you are not going to send me a check for 11 cents. This is amazingly stupid.” Then it hit me – this is our government at work one more time.

You may remember I wrote a column a while back about the Unclaimed Property Program that California runs. There are similar programs in other states. The Controller’s office operates this program which started in 1959. Recently, the controller’s office has stepped up the pursuit of finding these unclaimed assets. They have sent threatening letters to businesses telling them to hand over these unclaimed assets. Starting this year, businesses must answer a question on their California tax returns about whether they have complied with the law. As always, there are penalties for noncompliance. There are always penalties.

People do find assets that they abandoned. No question about it. And the assets are supposedly held into perpetuity. Yet somehow in 2018 California state government had swept $378 million into the general fund and in 2017 $399 million from unclaimed assets. Obviously, the state is not running this program benevolently.

After realizing the evil force behind this call, I stopped berating the young man. I realized his bosses were forcing him to do this because financial firms are heavily regulated and they want to be in compliance with state law even if it is moronic.

Why do I say it is moronic? Because there is obviously no level of asset held or check uncashed that does not need to be turned over by the rules of this program. Bernstein was spending valuable assets to locate people like me, produce a check, and then mail it to me (they sent it FedEx). All for 11 cents.

If the legislators had anything but contempt for their constituents, they would have added a de minimis clause into the statute to handle this matter. Since half of these people are failed lawyers, they know the de minimis means small, minor, or insignificant. That would stop this folly from continuing. Let’s put it at $100 because that is the cost of labor and fees to search out these items and return them to their rightful owners. It is even disrespectful to the people of the state as they most likely are not going to chase after a $47 amount owed to them because of the extensive paperwork to get it back and then the significant labor on the part of the state employees to return the asset.

In the meantime, Bernstein has spent meaningful resources and out-of-pocket costs to get me the check for 11 cents. I then must put a stamp on the envelope costing 60 cents to send to my investment advisor. My investment advisor has to then process the check.

I thought about putting the check in my drawer with the other “meaningful” checks I have received from those class action suits. Then I realized the entire cycle would start all over again.

And our elected officials wonder why they are so reviled.

*****

This article was published by FlashReport and is reproduced with permission from the author.