Why We Need More And Better Writing From Academics About Socialism

Having been a Democratic Socialist for over 20 years now (member of the Democratic Socialists Of America) I've beheld just about every permutation of how it's been distorted by know nothings as well as academics and others who ought to know better.  This is why I was generally pleased to read Barnard College poly sci professor Sheri Berman's piece in The Sunday Denver Post ('Five Myths About Socialism', p. 1B, March 31) to educate more citizens.

Prof. Berman did a creditable job overall separating facts from fiction ("myths") in her piece, but still left some misconceptions of her own.  First let's look at the positives!

  Under Myth 1 ('Socialism is a single coherent ideology')  Berman correctly points out one of the Right's recurring errors is conflating all forms of socialism. As Prof. Berman notes 

"Many attacks on socialism, as well as polls gauging its surprising popularity, take for granted that it’s a unified philosophy amenable to a crisp judgment.   Yet socialism has multiple meanings and interpretations, which have to be disentangled before a discussion about its merits can begin. One distinction centers on whether socialism is a is a system that must supplant capitalism or one that can harness the market’s immense productive capacity for progressive ends."

Berman goes on:

"Although Sanders and Ocasio-Cortez embrace the term “democratic socialist,” the policies they advocate place them much closer to yet another socialist tradition: social democracy. Social democrats say it is possible and desirable to reform capitalism. This tradition dominated the post-World War II European left and influenced the American Democratic Party, most notably during the Progressive era and the New Deal, inspiring Social Security, unemployment insurance and the eight-hour workday. "

Which bears many similarities to Greg Ip's WSJ  piece:  'Parsing the Lessons of True Socialism'  -Feb. 7, p. A2 . 

So it is good to have another sane and rational voice out there to skewer the endless nonsense. 

Prof. Berman is just as able tearing into Myth 2, that "socialism and democracy are incompatible".  As she writes:

"After the Russian Revolution, a commitment to democracy became a key distinction dividing socialists from communists. The Bolsheviks split off from the Socialist International in 1919 because socialists would not to commit to overthrowing capitalism by “all available means, including armed force.” And after World War II, socialist and social democratic parties became mainstays of democratic systems in Europe."

Which latter system has been referred to as "Rhine Capitalism".  This indeed is what most of those branded "Reds" by the Right, including Bernie Sanders, and AOC, aspire to, as opposed to outright democratic socialism.  To this end they have suggested using the tax commons to support such things as single payer health care, which the present system can't allow based as it is on Pareto capitalism, see e.g.

Brane Space: Is the U.S. Economic System Pareto-Compromised?

In truth,  a primary litmus test for whether U.S.  citizens are anywhere near actual democratic socialism would be their degree of happiness. We already know from The World Happiness Report ('Americans are becoming more miserable and data backs it up', Denver Post, p. 8A, March 24)the U.S. places at No. 17, down 6 places (probably coinciding with Trump's ascension).  Meanwhile, the Scandinavian nations that top the happiness list all practice democratic socialism - a point about which  even the great Oprah had to be educated.  See e.g.

• Oprah got perfect response from Danish woman on their social welfare state 

American marginal tax rates - certainly for the three middle income quintiles- would need to go up dramatically to even remotely compare with these nations - such as Denmark and Norway.  No one sees that happening soon, certainly so long as a Republican dominated Senate seeks to cede more and more resources to the wealthiest - including the top 1 percent. 

Myth No. 3:  All socialists want to abolish markets and private property.

Berman again knocks this trope flat on its face, exposing "liberal" (actually Neoliberal) prof Cass Sunstein as another dolt, as when he writes that  "once voters realize socialism means government ownership of 'the nation’s airlines, hospitals, restaurants and department stores they will sour on it."  Again, he commits the typical fallacy used by many Neolibs of slippery slope.   As Berman observes:

"Democratic socialists say that in principle they hope capitalism will disappear over the long run, but in the meantime they advocate piecemeal changes in the ownership and control of economic resources — bank nationalization, for instance. (Democratic socialists have never fully held power anywhere, so their programs remain largely theoretical.) And social democrats have focused on redistributing the fruits of markets and private enterprise rather than abolishing them. 

Most of the policies advocated by politicians like Sanders, Ocasio-Cortez and Sen. Elizabeth Warren (D-Mass.) — including universal health care, free college education, and higher wealth and income taxes — are clearly achievable within a capitalist system.  

This again would be Rhine capitalism which one would have thought Sunstein had heard of, but evidently not.  This brings us to Berman's  -

Myth No. 4 :  When socialism is tried, it collapses.

Again, this claptrap emanates from the typical libertarian trolls at the American Enterprise Institute - one of the nation's main propaganda factories (with the exception of Norm Ornstein, who seems to have his head screwed on straight).  Berman here cites recent twaddle  written by Mark J. Perry, a professor of Economics at the University of Michigan- Flint.  Well, we presume when he wrote that he didn't imbibe too much lead from Flint's water.

Then there is the Hoover Institution’s Paul R. Gregory who offered a primer on “Why Socialism Fails” in January 2018, again pulling nonsense from where the Sun doesn't shine.  But as Berman points out:  

"Communism certainly failed, but social democracy has arguably been the single most successful movement".  Then noting the rise of  "stable European democracies after World War II...because a stable social consensus married relatively free markets and private ownership with expanded welfare states, progressive taxation and other forms of gov't intervention in economics and society."

This generally has gone by the term "dirigisme" and was what JFK tried to use in his own tax policies - but lacked the majorities to implement.  (See, 'Battling Wall Street - The Kennedy Presidency', 1994, Donald Gibson)

Myth 5-  Socialism offers a ready-made solution to numerous current problems.

Berman writes :

"Socialism’s advocates today promote it as a near-panacea. It’s a possible  “answer to the climate catastrophe,”  writes a commentator in the Guardian. It “would remedy the systemic deprivation of people of color,” says  Connie M. Razza, director of policy and research at the think tank Demos. "

But this is too extreme a generalization. In fact, most academics who espouse  socialism - such as Yale professor  Martin Hägglund  and British economist John Gray,  know that there is no socialist "panacea".  At best, even democratic socialism can only ameliorate the worst excesses of Neoliberal capitalism.   

For example, one practical contribution would be to force huge capitalist corporations (like P&G) to stop marketing waste products (disposable diapers, sanitary pads etc. ) to nations lacking the systems and the infrastructure to process and absorb them, i.e. without contaminating their water and landscape:

An incremental change for sure, but enormous in terms of sustaining quality of life for many countries. In the case of India, we now know such corporate consumer marketing  has left India deluged with environmental waste containment disaster: canals clogged with detritus and toxic waste (see image above from WSJ, April 4, p. B3)  and contaminated water supplies arising from "many women discarding used sanitary pads in rivers - or flushing them down toilets- contaminating water supplies or causing sewers to back up."

 One might argue this isn't even a matter of socialism per se but rather putting the reins on capitalists and their marketing practices - or applying common sense regulations.  See also:

Environmental Policy

Dangerous Plastics Are a Threat to Us and Future Generations

These  pragmatic socialists then advocate only limited practical avenues to address the issues noted by Berman. For example, also advocating nuclear power as a critical component to address the "climate catastrophe".   As I already showed (Feb. 21 post, 'Applying Physics (and Some Math) To The Green New Deal') without nuclear power the energy numbers required for the green new deal to work simply don't add up.  Simply ending fossil fuel consumption in 12 years and going 'all green' (solar, wind, geothermal etc.) with no nuclear will not attain the 94 EJ (exajoules) needed to run our advanced  technological society.  (The alternative for an all green nation would be a 20-fold reduction in population, mainly in large urban centers - and returning to a largely agrarian existence.)

Berman again:

"But many of today’s democratic socialists lack clear plans for what they want to put in capitalism’s place and how this new economic order would generate the growth, efficiency and innovation necessary to achieve redistribution and raise living standards. Nor is it clear that democratic socialists have realistic plans for dealing with other vexing social controversies, such as anxieties over immigration. Some argue that many current problems can be solved by new versions of policies that worked during the mid- to late 20th century, like a Green New Deal; more government spending on health care, education and infrastructure; and higher taxes. "

It is true that Democratic Socialists don't have all the answers, i.e. "clear plans" to solve immigration or infrastructure, but they are not required to have them. After all, we are really talking about social democracy priorities here, not a future socialist state! In other words, there will never be a real democratic socialist USA, or president. The existing capitalist trade, banking, investment and other structures are simply too embedded to allow that.   What is needed then is not a total supplanting of existing structures but rather an adjunct means to marry market initiatives with societal equalizers, such as higher taxation - oh, and less military spending!

Berman once more in her Myth 5 response:

"Republicans insist that these initiatives would destroy growth and turn the United States into a tyrannical economic basket case like Venezuela. True, conservatives made similar claims in the past about major government initiatives like Social Security and Medicare. But it is surely legitimate to press advocates of increased government spending on how they would pay for these programs."

Here, one may turn to an economist by the name of Stephanie Kelton,  now gaining a higher profile as the themes of social democracy and socialism have come to the fore in the era of monumental corporate greed.

  

Stephanie Kelton of stony Brook University showing how elements of Dem candidates proposals can be paid for via modern economic theory (MMT).

Kelton invokes modern monetary theory (MMT) as a much needed counterpoint to the orthodox Pareto -based economics of generally taught monetary theory. That latter, again, values the dollars of the wealthy more than the dollars of the poor or middle class. Because it does, the whole system - from tax cuts for the rich, to looser regulations on water quality and fracking - are geared to help the rich.  Recall that  by Pareto economics, as Martin Feldstein once argued, it's better to pay a patient not to get a colonoscopy (or other screening) than to do so and her paying thousands less than the procedure would cost (without any insurance).

Prof. Kelton argues: "the government doesn't need to worry so much about how much it borrows to pay for spending programs... The constraint, according to MMT isn't the deficit but whether the borrowing and spending spurs inflation and disrupts economic activity."  (WSJ, 'Theory Behind Democratic Proposals Gets A Public Face', April 1, p. A3)

In a real way, this is absolutely true.  The U.S.  government has borrowed from Social Security for decades now, totaling up $3.4 trillion in debt to the program - but you don't see any hand wringing about it.  The money mongers - like Feldstein and cohort- simply dismiss the borrowed funds as "special bonds" that don't need to be repaid. It's just the government borrowing from itself, no biggie! Basically, according to the MMT, the same thing can be done in other areas - like implementing Medicare for all or even a public option. 

Well, Robert Pollin - a Professor of Economics at the Univ. of Massachusetts-Amherst - kind of adopts this model on how Medicare for all might be paid for ('The Case for Medicare for All', WSJ,  March 27, p. A17), writing:

"Taking cost reductions and expanded coverage into account, we estimate that Medicare for All could operate with an overall budget of $2.93 trillion - nearly 10 percent less than current spending. To finance this, the government begins with $1.9 trillion already in hand - nearly 60 percent of the total needed - that already pays for Medicare, Medicaid and smaller public programs. The government would therefore need to take about $1 trillion out of what businesses and families now pay to private insurers."

His last aspect is controversial but he has the solution: "We propose that all businesses that currently purchase health insurance be mandated to pay 92 % of what they now spend into Medicare for All  - saving 8 % of their health care expenditures."

I suspect this is eminently doable but requires political as well as social will.

It is also common sense to cut down on the absurd current level of defense spending - mainly for new (e.g. "hypersonic") rockets , jets or new nuclear bombs. Any money that is allocated to the DoD ought to go to improving base housing for military families. (Many now faced with living in moldy homes after Hurricane Florence hit S.C.)

Alas, the nasty meme that access to the VA medical care - with long lines, long waits-  is socialism and is a "model" for all that can go wrong has also made the scene. ('If You Like Socialism, You'll Love the VA' WSJ, April 2,  p. A13, by Karl Zinsmeister).   As the author puts it:

"Draw a military paycheck for a few years, and you're entitled to cradle to grave support for you and your family members. Health care at any of 1,300 sites, housing guarantees, up to 100 % of college costs."

But he gets two things wrong: first, those benefits have been built into the basis for our current volunteer military. If you don't like their scale then you need to go back to the good ol' days of the draft. Second, the volume of benefits to millions more has been  direct result of  U.S. military overstretch, putting too many troops in too many locations and for too many small scale skirmishes or even occupations.  When you therefore make a deal with volunteers, get them into 'x' wars or occupations, you can't now bitch and whine they are sucking up too much money.  But again, if there is bitching then it is clear higher taxes are needed. Either that or fewer wars, leading to the need for fewer troops. Hence, then you will have fewer VA and other benefits to dole out. 

Berman again:

"What distinguished the postwar era was the combination of rising growth and equality. If socialists want to convince Americans, Europeans and others that they have the best solutions to contemporary problems, they need to show that their policies can generate substantial wealth and resources as well as, simultaneously, a more equitable distribution."

But she forgets that much of the rising growth came because of deficit spending!  Indeed, following World War II - as Prof. Donald Gibson notes ('Battling Wall Street: The Kennedy Presidency', Sheridan Square Books, 1994), the federal policy was one of deficits. To quote Prof. Gibson (p. 84):

"The War was paid for primarily through borrowing and deficit spending on an unheard of scale."

As Gibson also observes, during the eight years after WWII -when deficit spending stopped-  the main consequence was "stagnation and three recessions".  This dovetails precisely with Prof. Kelton's MMT.  Further,  after JFK became president and returned to deficit spending:

"The U.S. economy returned to and even exceeded the rapid growth displayed during the pre-stagnation period" (of World War II)"

In other words, contrary to the orthodox monetarists' gospel, not only did Kennedy's policies raise economic growth, but they did so at a rate comparable to WWII deficit spending!   This historical perspective shows me that MMT cannot be summarily dismissed, even by the likes of a Paul Krugman.

Anyway, Prof. Berman did a creditable job writing on a difficult topic for which we need more academic insights. For that effort I award her a gentle lady's  C+.

See also:

Economic Policy

Supervillain Economics

by Jim Hightower | April 6, 2019 - 5:21am | permalink

And:

Capitalism | Markets

“Free” Markets and the Attack on Democracy

by John Buell | April 6, 2019 -

Capitalism | Socialism

Capitalism or Socialism. Which Will it Be?

Going To Harvard This Fall? Stick To Science & Math - Not Subjective Indoctrination Majors- Like Economics!

Harvard Astronomy Chair Avi Loeb making observations at the Harvard U. Observatory

WSJ op-ed columnist Peggy Noonan ('Kids, Don't Be Success Robots', March 16-17, p. A13)  was correct when she advised:

"My advice to students still considering college in the year 2019: Avoid elite universities if you can.  They're too often indoctrination mills anyway."

Well, let's amend that a bit. If you are lucky enough to have secured entry to Harvard this fall - say to study astronomy - you are doubly fortunate.  The reason is you will experience  actual inquiry over indoctrination.. Prof. Avi Loeb achieved some renown on the basis of his co-authored paper appearing in Astrophysical Journal Letters in November — thrilling E.T. enthusiasts and upsetting the  skeptical stuffed shirts and purists in the halls of space academia. In other words, upsetting those more indoctrinated than inclined to do actual open inquiry., which is what professional astronomy should be about.

 Recall in my post on Loeb's critics last month  I cited one popular astronomer - the late Carl Sagan - who actually expressed regrets (to Dr. J. Allen Hynek) he had not been more open about accepting the reality of UFOs.  Sagan had admitted to Hynek that he really did accept the validity of UFOs but "couldn't admit it in front of colleagues."  See e.g.

https://setiathome.berkeley.edu/forum_thread.php?id=76926

Such is the hallmark of genuine inquiry in that one can admit one is or was wrong, either in one's previous research or previous attitude to some object of inquiry.

Contrast Prof. Loeb with another Harvard prof, Martin Feldstein who - it can be argued - is more invested in indoctrinating his Ph.D. students with the codswallop of modern Pareto-based economics.  Recall, in Pareto economics "Pareto efficiency" rules and the  basic premise is that each dollar of a rich man is worth much more than that of a poor man. Hence, any transfer of money from rich to the poor hurts the rich man much more than any poor man.   

Such a template was invoked by Feldstein some years ago when he argued that ordinary folks ought to be paid money not get expensive medical screening tests, such as colonoscopies.  Indeed, Feldstein argued that given there is no way the ordinary patient could afford to pay out of his pocket for such a test (usually $3,500- 4,000) then it makes more sense to pay her to take a hike. To fix ideas: 

 If the insurance paid part is $3,000 (while the patient's reservation price is $2, 500) it makes more sense to give the prospective testee $2,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $3,000 subsidy. 

(Note:  The reservation price for a given  product or service is just the maximum price a person is willing to pay. So, if I have a 1954 Henry Aaron TOPPS baseball card (now with a very high book price) and I offer it to you for sale, and ask what the top price is that you'd pay, if you respond "one hundred dollars" then that is your reservation price.)

The same scheme can be carried over to environmental considerations, especially say, in implementing global warming regulations or fuel taxes to alter behavior - say to cut carbon emissions. Since - according to Pareto economics -  the lives of all the poorer segments of the populace are worth less in terms of their dollar use (i.e. their "utils") then those like Feldstein would always argue to allow more of them to perish from climate-caused catastrophes than to cause harm to the rich.  The latter by exacting carbon costs which will upset the commodities and stock markets, and whole economies.

Now in his latest WSJ op-ed ('The Debt Crisis Is Coming Soon',  March 21, p. A19)  Feldstein continues his Pareto efficiency shtick as the be-all, end-all to the U.S. exploding debt problem. At the top of his hit list is, you guessed it, "entitlements", i.e.

"Thus the only option is to throw the brakes on entitlements.  In particular, the government needs to hold back the growth of Medicare, Medicaid  and Social Security."

Why does he argue thus? Well because of the metastasizing debt.   As Marty is wont to complain (ibid.):

"According to the Congressional Budget Office, the deficit this year will be $900 billion, more than 4 percent of gross domestic product.  It will surpass $1 trillion in 2022.  The federal debt is now 78 percent of GDP.  By  2028 it is projected to be nearly  100 percent of GDP."

But in fact, "part of the increase in the deficit was attributable to the shift in timing of certain payments, which made the deficit appear larger.  If not for those timing shifts the deficit would have risen only 25 %  from the same period in 2018." (WSJ ,   March 23-24, p. A4).

Apart from that, let's bear in mind the 2017 Trump- GOP tax cuts added nearly $1.5 trillion to the deficit by itself.  ("The tax code overhaul in 2017 had constrained federal revenues over the past year." - ibid.)   It was evident from the time this trash was passed the GOOPs would need to find ways to make up for the losses, so have focussed  on cutting Medicare ($845b in Trump's recent budget, and gutting the ACA - which would toss tens of millions off their health care.)

So how does Feldstein propose to deal with these entitlements? His plan emphasizes (ibid.):  "Raising the age of eligibility for full Social Security benefits from 67 to 70."  Here, Feldstein shows that - like Alan Greenspan - he's oblivious to the the fact  that a third of seniors have Social Security as their only income. Also, more than 50 percent of Americans claim their Social Security by age 62.  

Why are so many citizens doing this? It isn't always a case of not wanting to work but rather, for too many,  not being able to last at demanding physical jobs, i.e. landscaping, roof repair, nursing home aide,  etc.  It is fairly easy to work past 70 when it's all consulting, paper pushing or brain work.   But not so much when one is involved in heavy day -to -day labor like a nursing home caretaker moving an elderly patient from bed to chair and back many time a day - not to mention other tasks, such as bathing, toilet use etc. Work that takes its toll on the back, as well as many other parts of the anatomy.

Interestingly, nowhere in Feldstein's op-ed is there any mention of cutting the defense budget, despite the fact we have ample evidence it's one of the biggest yearly deficit engines, e.g. 

We also know that at $716 billion annually, the U.S. spends more on the military than the next 11 nations combined, That includes Russia and China. As one recent WSJ letter writer put it: "The Pentagon already has enough enough resources to keep America secure.":

The sad fact is that too many of the nation's seniors do not, yet those like Marty Feldstein would just as soon indoctrinate more Harvard economics students into a useless system that's also heartless.

Kids, if you're headed for the ivy halls of Harvard, pick astronomy to study, not econ from a Feldstein clone; adjunct, lackey or TA.  Your brain will thank you for it, so will millions of us on "entitlements"!

See also:

Social Security

Honoring Frances Perkins, the 'Mother' of Social Security

AND:

Healthcare Policy

Rural America Needs Medicare for All, and Fast

Trump's Asset Bubble Economy - Based On Irrational Exuberance- Contains Seeds Of Destruction Within It

The Trump buffoons, and Preznit "Gaslight" himself,  are busy bragging on the 4.1 percent growth over the last quarter -  the largest since a 5 percent spurt after Obama took office. As we know from previous Bull Market terminations, market crashes, irrational exuberance reigns before the fall - as it does now. Scanning over the financial headlines in both the WSJ and Financial Times the past six months all I've seen are warnings and insinuations the alarms are "blinking red" - as they did before 9/11. But too few are paying attention, they're too drunk on Gaslight's Kool aid.

Too many citizens are drunk with their seemingly flush investments, including 401(k)s and IRAs, and they are failing to see the warning lights, far less pay any attention to them. It's much too easy to just coast and enjoy the economic bounty while it lasts  - besides it's believed it's about the only positive aspect to the Trump Imperium's reign.  Most economists, even those who are citing the warning signs, grudgingly concede the dousing of regulations (i.e. citizen protections) as well as the tax cuts of last year- have ginned up the economy.  Others have rightly warned that basic economics says you do not gin up or stimulate an already humming economy because it risks inflation - and that means the Federal Reserve raising interest rates. That scenario carries the same horrific specter for the markets as crucifixes do for vampires.

The other aspect missed by too many in their stock and bond hubris, is the fact the stock market was revved up after GE was replaced in the Dow Jones Industrial Average lineup by Walgreens, after being a member company for more than a century.. 

How many are aware, for example, that that Dow was also 'adjusted' ('juiced' by might be a better term) on March 17, 1997? And by the people that invented it (Dow Jones, Inc.)? As Jay Hancock notes ('Dow Index Detaches from Reality', The Baltimore Sun, April 4, 1999, p. 1E):

Quote:

A committee of green eyeshade types juiced the lineup, blackballing four down-at-heel Dow members and picking ringers as replacements. Out went Bethlehem Steel, Woolworth, Texaco and Westinghouse. In came Johnson & Johnson, Wal-Mart, Hewlett-Packard and Travelers. One -eighth of the Dow membership changed that day, but you'd never know it from looking at those mountainous Dow graphs....Without the switch, by my calculation, the Dow would have been near 9,000 last week. Not 10,000.

What Hancock is basically saying, is that the alleged stock market upon which folks are basing their retirements and long term investments is a myth. It doesn't really exist because it lacks any fixed identity, e.g of component companies, over time..  It's like a human who changes personas every so often so no one can remotely know who he is.. That may sound like no problem, but it means the human's short and long term behaviors are unpredictable and it means the same for a stock market predicated on a DJIA subject to expedient reshuffling.  It also renders the frequent citations of rate gains over long periods of time, e.g. "7 % per year"  gains or whatever, totally fictitious. Since the identity of the DJIA alters with each replacement, or substitution it can't be the same over long duration. So you can't cite a fixed average gain - which implies component stability - over decades,. say from 1987 until now.  

Indeed as a WSJ piece notes ("In GE Ouster, Dow's limits Stand Out', June 21, p. B12):

"The Dow Jones Industrial Average has ejected numerous Blue Chip companies over the past decade including miner Alcoa Inc., Westinghouse Electric Corp. and this week General Electric Co."

Nor are serious market watchers particularly happy with this state of affairs.  Robert Pavlik, senior portfolio manager and chief investment strategist at SlateStone Wealth said of the decision to drop GE (ibid.):

"Honestly, I didn't like the move. It's supposed to be an industrial average that is reflective of the overall economy of the United States, and if that's the case then why replace it with Walgreen's?"

Well, the only reason would be to juice the index, by changing its identity - again reinforcing my point that what people are investing in lacks any persistent identity. Basically, people are pouring their money into an extravagant "pig in a poke". Most ominously (ibid.):

"The removal of troubled businesses appears to have helped keep the index moving higher."

Or, three card Monte on steroids.

Having dealt with the artificial identity of the DIJA - and hence the DOW overall   and how the several replacements of member companies  renders the "market" a fiction,  we now come to the more immediate factors destabilizing this fiction. Three article alerts that appeared in March and April and remain relevant today include:

1) 'Investors Fear Goldilocks Market Is Ending', noting "Nine years into a roaring stock bull market, fund managers are paying their last respects to Goldilocks".

2) 'Bear Markets Can Fly In On Their Own'  warning "stock market bulls shouldn't be basing their bullishness on recent bullish activity."

3) From The Financial  Times , April 17, ('IMF Sounds Alarm On Excessive Global Borrowing') :

"The world's $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago, the IMF has warned, sounding the alarm on excessive global borrowing.  The fund said the private and public sectors urgently need to cut debt levels to improve the resilience of the global economy, and provide greater firefighting ability it things go wrong.

Fiscal stimulus to support demand  is no longer the priority the IMF said Wednesday in a report published at its spring meetings in Washington. "

Let's note here that "support demand"  referenced in the FT account means support of  "aggregate demand", i.e. getting citizens to spend more - which was the basis for the Trump-GOP tax cuts. This was an incredibly bad play given how much these cuts will add to the deficit, going forward, and how little they would contribute in terms of a job picture then already near full employment. And as the WSJ's Greg Ip showed, they will now increase the trade deficit as well, approximately $35 for each $100 increment in the budget deficit.  Since the tax cuts are now conservatively estimated to add $1. 5 trillion to the deficit, you can do the math for the trade deficit using Ip's ratio. 

Why does the U.S. run a trade deficit? Well, because "it consumes more than it produces while its trading partners collectively do the opposite."  Ip notes "another way of saying this is that the U.S. invests more than it saves while other countries save more than they invest."

The FT piece on the IMF warning goes on noting what is most worrisome:

"World borrowing is more than twice the size of the value of goods and services produced and 225% of global gross domestic product. This is 12 percentage points higher than the peak of the previous financial crisis in 2009."

And the U.S. is singled out as a primary debt offender, e.g.

"Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high.

The fund urged policymakers to stop 'providing unnecessary stimulus when economic activity is already pacing up' and called on the U.S. to 'recalibrate' its fiscal policy and increase taxes to start cutting its debt."


This previous significant reporting is relevant to the following more recent  WSJ reports:

1)'Markets Flash Caution For Stocks' (p. B1, April 14-15):

Evidence for crowded positioning, elevated valuations and fears that growth may be losing momentum.


2)'The National Debt Is Worse Than You Think', (p. A18, April 18)

"Today's outlook for revenue growth is based on policy that's unlikely to pan out. The CBO estimates that if current policy continues the cumulative deficit will rise a further $2.6 trillion over the next decade, to a staggering $15 trillion.


'3)Supply Starts To Crimp Growth' (p. B1, April 25)

Economic data are showing a strained supply side.  Set against global demand, supply chains are 'struggling to keep up'. This is increasingly a global phenomenon. 

4) 'Don't Get Hung Up On Yields' (p. B16, April 25)

Yields marching higher comes at an odd time, since the recent economic news hasn't been great. But what it also shows is that investors are operating with blinders on and ignoring events, such as the rise of right populists in Europe, and staggering global debt,  that they ought to have on their radar. Too much irrational exuberance, including using leverage to purchase more stock shares. 

 5) In GE Ouster, Dow's Limits Stand Out' (p. B12, June 21)

See earlier description of effects.

6) 'Consumer Spending Rise Has Dark Side (p. B1, July 16)

The Federal Reserve reported outstanding consumer credit debt rose $24.6 billion n May from a month earlier, or nearly double the $12.8 billion economists expected.

6) 'Tariff Threat Gets Closer To Consumers' (p. A8, July 18)

Massive increased costs on a variety of consumer products from cars and car parts, to furniture, to mobile phones, home improvement items, networking gear and seafood.  Takeaway? Consumers may have to go into more credit card debt to afford the higher prices of durables, especially, if their wages continue to stagnate. 

7) 'Fed Shouldn't Ignore Yield Curve' (p. B9, July 23)

The Fed isn't worried about the yield curve, for the same reason it wasn't worried before the 2008-09 financial crisis, but it should have been. (The yield curve is the difference between shorter and longer term Treasury yields - a key indicator for the future of the economy.)

"Today evidence abounds  - from supertight spreads, to negative yields, to high stock valuations to the popularity of structured products - that investors are willing to take risks to capture yield."

More irrational exuberance!

8) 'Stock Outflows Swell In Flight For Safety' (p. B13, July 27)

Investors are fleeing U.S. stocks at a rapid clip  as continuing market volatility and trade tensions pushes them to seek safety among less risky assets such as U.S. Treasurys. The exodus coincides with the implementation of the first round of tariffs between the U.S.  and China.

9) 'Stocks Are Up Despite Troubles' (p. B1, July 27-28):

Four primary risks exist now to the market's momentum: i) higher bond yields, ii) global economy - debt impacts, iii) Trump's trade war, especially new tariffs, iv) European politics.  Investors aren't pricing in much of a drag from the rest of the word, wrongly."

10)'Save Interest For Rainy Day' (Martin Feldstein,  p. A17, July 27):

"The downturn is almost certainly on its way. The likeliest cause would be a collapse in the high asset prices that have been created in the exceptionally relaxed monetary policy of  the last decade. It's too late to avoid an asset bubble. Equity prices have already risen far above their historical trend.  The price -earnings ratio of the S&P 500 is now more than 50 percent higher than the all time average, sitting at a level reached only three times in the past century.

The inevitable return of these asset prices to their historical norms is likely to cause a sharp decline in household wealth and in the rate of investment in commercial real estate. If the P/E ratio returns to its historical average, the fall in share prices will amount to a $9 trillion loss across all U.S. households."


Feldstein's argument - given the preceding  - is that it is essential to keep raising interest rates (the Federal funds rate) to at least 4 % over the next two years, to have room to maneuver out of a recession and stock crash should  these occur. And again, all the alarms are blinking red, despite the hubris and denial of so many, inebriated by irrational exuberance.

Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warned (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

But even if Silver's statistical projections don't get you roused, the highlights of the preceding six months should, if you've taken the time to read them.  This brings us to collation of the information and then asking the question: Okay, the Trump asset bubble economy is like the "Titanic" heading for the iceberg, so what will be the signs of imminent sinking?  What warnings will we have?

Actually, very little if you're not already paying attention  - including to three things that could trigger a massive deleveraging: a) Trump's insane trade war, b) the ever mounting global debt c) the unwinding of  the Fed's remaining $3.8 trillion in QE (quantitative easing) assets.

In the first case the situation is vastly more perilous than either the political pundits or corporate media let on.  The fact Trump had to go to a Depression- era program to snatch $12b of taxpayer money for a bailout (sorry, Mnuchin, that's the word I'm using) is not a good sign.  It is indeed only a temporary fix and not a very good one. If it doesn't work - and it won't - then what?  Added to that, only a few of the more insightful farmers in flyover country appear to grasp it isn't just a loss of current revenue to pay their outstanding debts, but a loss of their markets - i.e. in China, Mexico which they'd spent years cultivating. Once those markets are gone to competitor nations there will be little, if any, chance of regaining them. That means permanent debts - many farm foreclosures- and little money for more bailouts.  (Apart from which many other trade sectors, e.g. the fishing industry, may also be looking for gov't handouts by then.)

It is also well for people of any sense to treat ALL Trump's statements on trade as LIES.  I cite here the WSJ piece, 'Europeans Dispute Trump Trade Claim' (July 28-29, p. A5)  in which we learn:

"While Mr. Trump told an Iowa crowd Thursday that "we just opened up Europe for you farmers", officials in Brussels later said he did no such thing."

Adding later:

"The U.S. side 'heavily insisted to insert the whole field of agricultural products', Mr. Juncker told reporters immediately following the meeting, 'We refused that because I don't have a mandate and that's a very sensitive issue in Europe."

Part of what he was referring to was GMO crops, a very "sensitive" issue for the EU citizens indeed..  In any case, given Trump's claims were palpable bullshit, the farmers again are left with no outlets for  their produce. Their wares will then keep piling up in silos, storage bins while other nations, like Japan, step in and reap the benefits.  Chance of getting their original markets back after Trump's trade war games are over? Slim and none.

Meanwhile, the mounting global debt has reached stupendous levels and already been warned abut by the  IMF which took a dim view of the U.S. tax cuts,  that only added to that debt.  As per a Bloomberg report from May, "the U.S ran a $466 billion current account deficit last year, meaning it imported far more than it exported".  In addition, the U.S. remained the "largest driver of global current account balances in 2017, running the world's largest deficit and adopting policies - i.e. a shift to much larger deficits via tax+ cuts - likely to increase imbalances in coming years."

The U.S. rightfully and properly ignored deficits to staunch the Great Recession and pull the nation back from the fiscal- credit  abyss, i.e. via stimulus spending ($797 b) in 2009 . But Washington not only failed to wipe out the red ink when the economy rebounded, but added much more via massive, uncalled for tax cuts. Now the red ink is a red tsunami and the entire global debt has rendered most assets suspect, or under water, meaning based on using leverage for purchases.

Bottom line: this current economic "explosion" is built on quicksand. You cannot base a sound economy on exploding debt. Rising debt also threatens to weaken the global power of the U.S. as it increasingly depends on foreign investors to lend money to the Treasury. As of now, the Chinese own 5.7% of all U.S. Treasury securities to the tune of $1.2 trillion. Americans had better pray every night Trump doesn't piss them off in his goofy trade war to the extent of calling in those markers.

In addition, we know that tax cuts added to an already stimulated economy can destabilize it into depression or serious recession. As I pointed out in my Nov. 29 post from last year:

"Calvin Coolidge signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.  Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October,  1929."

But. most of us suspect the immediate trigger could well be the Fed's unwinding of the 3+ trillions for easy money during the QE era.  As The UF puts it:

"As reported by Business Insider, a report from the global head of Société Générale's asset allocation team projected that the unwinding of easy money policies and broken politics in Washington will cause  today's market to unravel."

The 'broken politics' refers to an inability to resolve issues like the debt ceiling and out of control spending, especially with inadequate revenue coming in owing to addle- brained tax cutters.  And already Preznit Gaslight is threatening a government shutdown if he doesn't get his cockeyed "border wall", expecting the Dems to give in to his extortion.   The next debt ceiling increase is likely to exceed $22 trillion, and the money still to be unwound from the Fed's QE program is nearly $4 trillion.  Adding money for DoTurd's border wall would be one more spark to ignite the final unraveling of his "great" economy. Put it all together and you are looking at a major catastrophe ready to happen, never mind the current economic growth happy talk dominating much of the press.

The Forecaster goes on to note that other sources predict an even more dire end to this Bull, viz.:

"Legendary investor Jim Rogers says we're about to suffer the biggest stock market crash in our lifetime. And he believes it could happen later this year."

The UF goes on:

" Why should we listen to him?  The 74 year old not only helped found one of the most successful hedge funds of all time, he's made a number of market calls including the last housing crash. As Rogers observed, the debt that fueled the last downturn is nothing compared to the debt we've piled up since then. Over the last 10 years our national debt has more than doubled. His advice, 'Be worried!'

Would a stock crash- recession be the worst thing to happen? That depends on your perspective and political tribe affiliation.  Especially if you're a member of the Trump personality cult. If you're delirious about Trump and love his deregulation, tax cuts and so on, you will be hysterical after a 50 percent crash, followed by recession. You're best bet now is to stock up on anti-depressants.

For the rest of us, such events - horrific as they may be - finally portend an end to Trump's  "Teflon" cover via a fake economy based on asset bubbles and stock buybacks. As WSJ columnist Greg Ip put it regarding the current expansion based on debt and fumes (my terms), "this benefits Mr. Trump since it makes a recession less likely before he faces voters again in 2020."

My bet?  A stock crash either this year or next, coupled with Mueller's probe finding for conspiracy of the Trumpies with Russkies, will finally send this deadbeat pretender and traitor back to whatever crack in hell from which he crawled.

See also:

http://www.smirkingchimp.com/thread/robert-reich/80418/why-wages-are-going-nowhere

Excerpt:

"The typical American worker now earns around $44,500 a year, not much more than what the typical worker earned in 40 years ago, adjusted for inflation. Although the US economy continues to grow, most of the gains have been going to a relatively few top executives of large companies, financiers, and inventors and owners of digital devices. America doesn’t have a jobs crisis. It has a good jobs crisis."

And:

http://www.smirkingchimp.com/thread/will-bunch/80381/that-raise-you-were-promised-last-year-wall-street-took-it-from-you

Excerpt:

"Now, the post-tax-cut numbers are coming in, and you’ll be shocked, shocked to learn that America didn’t get that pay raise after all. In a widely read column last week for Bloomberg, Noah Smith pointed to statistics from PayScale showing that so-called real wages — your paycheck, but adjusted for inflation — actually fell in the just-ended second quarter of 2018, by 1.8 percent."

And:

http://www.smirkingchimp.com/thread/reese-erlich/80391/us-losing-trade-war-with-china

And:

http://www.smirkingchimp.com/thread/william-rivers-pitt/80403/will-this-trade-war-be-donald-trump-s-political-waterloo