FWIW # 33 I don't understand ...

Posted by Eugene Kelly (E. Aly) on Mar 15th 2023

The world is taking on an Alice in Wonderland appearance. Usually, simply examining the details helps me understand what is going on. But there are some situations I can’t understand, no matter how deeply I examine them.

I don’t understand why the analysts continue to say inflation is coming down and the Fed should stop raising interest rates. Other analysts are preaching that the stock market is still overvalued and subject to a sharp drop. Any student of economic history understands that a 5% fed funds rate is not going to send an economy into a tailspin. What it will do is stop reckless gamblers from using cheap or free borrowed money to keep terrible businesses operating. Experienced entrepreneurs who are seeking a double-digit return on their investment have no problem with interest rates at these levels.

It’s unlikely inflation is coming down anywhere close to what the Fed says is its goal. Inflation, once entrenched in an economy, is significantly harder to eradicate. It takes time, a lot of time, and that’s what the stock market understands. Not just our stock market. The British and German indices last month reached all-time highs even though their economies are struggling. This divergence between what is happening in the markets and what is happening in the economy is a clear signal that central banks are not going to do what is necessary to bring inflation under control in the short term. The world and the US are likely to experience elevated inflation levels for probably years to come, particularly after what the Fed and the administration has done with the latest financial crisis.

This current implosion of confidence in the banking system with the three bank failures in the last month, could be the spark that ignites the implosion of value in the global and US economies. SVB bank and Signature Bank have assets, but the market value of those assets is less than the carrying value. The issue at hand is precisely why banking is such a risky business: banks take in deposits that can be withdrawn at any time and either buy bonds with the deposit money or lend it to someone. In both cases, the money is put to work for a longer period than the depositors are required to keep their money in the bank. If a percentage of depositors (the exact number depends on the balance sheet of each bank) pull their money out and the bank can’t sell bonds or call in the loans made, the bank is in trouble. In a simplistic way, this is what is happening now. The major implications from what solution the Fed and the Biden administration put in place are threefold: (1) hedge funds, other banks, and leveraged speculators are going to rush to liquefy some or all of their investments. The stock market will see significant selling. Whether or not this selling overcomes the third implication is debatable. (2) Major institutions, mutual funds, and some significant speculators have moved a great deal of money into illiquid investments over the last several years. These market participants will feel a liquidity and cash flow squeeze, which can result in increased selling of liquid assets or fire-sale conditions on these illiquid assets as was seen in 2008-2009. (3) Many on Wall Street will say that inflation will come down faster because of this financial implosion and likely recession. Don’t believe that wishful thinking. If central banks, in particular the Fed, stop shrinking demand for goods and services by either not raising interest rates higher or even cutting interest rates, inflation will be entrenched even deeper in the economy and take more severe and longer action to eradicate it. The only way inflation will be reduced to the Fed’s target is for the Fed to change policy from pegging interest rates to managing a steady and non-inflationary rate of growth for the money supply. If they do what is necessary, interest rates will move higher than the Fed and the political leadership want, but the alternative is unacceptable inflation for a long time.

The instigator of this latest financial crisis lies at the feet of the Trump and Biden Administrations and their irresponsible fiscal actions before and after the pandemic. The co-conspirator was and is the Fed, who made it possible for the political leaders to be irresponsible. Most of the blame goes to the bank’s management who did not, either willfully or out of ignorance, listen to or heed the messages from the Fed that interest rates were going to be raised.

Keep in mind that central banks, at the behest of their political masters, manage monetary policy to allow for fiscal flexibility. Every percentage point of inflation every year devalues the currency debtors will use to pay back their creditors, and governments are the largest debtors. Suppressing interest rates—and they are still being suppressed by the Fed even at 5%—while continuing to create the monetary aggregates fostering inflation is a signal for investors to own well-managed companies.

Know what companies you want to own and at what price a company is attractive. Be patient. Meanwhile, keep invested in the companies you own and build liquidity.

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I don’t understand why the Sierra Club, the Nature Conservancy, the National Audubon Society, the American Bird Conservancy, and ardent environmentalists are silent about what is happening to this country’s bird population from wind turbines. The following information comes from an article, Saving Eagles … with Markets, byMolly Espey (Milken Institute Review, First Quarter 2023, Vol. 25, No. 1). This article was adapted from a paper co-authored with Eamon Espey for the Property and Environmental Research Center in Montana. These are some of the statistics in the article:

1.Approximately 681,000 birds are killed annually by wind turbines.

2.Thousands of these birds killed annually are bald eagles, golden eagles, hawks, owls, and other raptors. Large birds are more likely to collide with wind turbine blades due to their size.

3.Wind turbines, responsible for killing this number of birds, account for 10% of the country’s total utility-scale power generation. The Department of Energy aims for wind energy to make up 20% of the total by 2030 and 35% by 2050. So, the number of turbines is likely to be much higher in 2030 and 2050. Why aren’t the rich environmental organizations fighting this destruction of bird life?

4.Since wind turbines are in remote locations and the energy needs are in cities, the transmission capacity is projected to require a 60% increase by 2030 and nearly triple by 2050. Researchers have found that between 2006 and 2011, electrocution by wind energy transmission lines accounted for 50% of dead golden eagles and 10% of dead bald eagles.

5.The Bald and Golden Eagle Act of 1940prohibits the killing of eagles or interference with their natural behavior. Yet the US government gives permits to wind generators to kill a certain number of eagles annually. Since 2016, these permits have been issued for 30-year periods and allow the “taking” of 4,200 bald eagles. The article doesn’t state whether there is a quota for golden eagles or other raptors. How many operators are there? Each wind farm operator pays the same amount for this permit. The author argues this is not the best practice for handling this indiscriminate killing of eagles and other birds. She advocates a market-based trading system of permitted killings from one operator to another.

The article is most revealing and intriguing. If 681,000 birds die annually with the current turbines and the energy capacity need is expected to nearly triple in the next 27 years, what will be the kill rate as capacity increases? Have we as a country traded our concerns about birds for the pursuit of a goal to stop the planet from heating one degree when the science (not the religious fervor) does not even support the claim that the world as we know it will come to an end? Is there no credence given to the fact that going back to at least 500 AD, the real calamities brought about by weather pattern changes were periods when the earth experienced colder-than-usual temperatures? Who benefits from this pseudoscientific misinterpretation of reality?

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I don’t understand why the country is put through this illogical and completely misconstrued contest over the debt ceiling and the outstanding debt. Both sides of the political aisle are responsible for the amount of spending and debt outstanding. It’s just as revolting to hear Democrats pontificate that spending is investment as it is to hear Republicans say the country is going broke and we are mortgaging the future of our children and grandchildren. Both groups of “public servants” are stretching the truth so far that it is unrecognizable.

Anyone truly interested in reducing deficit spending and creating a surplus in the federal budget for a defined period (to reduce the outstanding debt) should grab some Wall Street financial analysts, a sprinkling of economists, and a supercomputer to examine the period 1991–2000, when George H. W. Bush and the two parties put together an increase in taxes and spending restrictions that led to a budget surplus late in the Clinton administration. Economists and financial markets worried that the surplus would eliminate all US Treasury notes and bonds outstanding in a relatively short period of time. While analyzing the actual experience, perhaps a real investigative reporter could piece together the reason George W. Bush and the Republicans refused to renew the fiscal framework negotiated by his father and accepted by both parties that led to the surpluses.

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I don’t understand why these same political leaders can’t fix Social Security once and for all. They stretch the truth until it is not recognizable. There are 67 million people receiving Social Security. There are 131 million full-time workers in the United States, almost all paying into the Social Security system. Is Washington saying the Social Security recipients get more than these people are paying in? If so, there is an actuarial imbalance. As a matter of fact, the average Social Security recipient gets back a lifetime of payments into the system in approximately six years.

There are some very smart actuaries working for profitable insurance companies that can be called upon to actuarially determine the correct amount a Social Security recipient should receive over their statistical life expectancy using a realistic discount rate. This would reduce the costs. With this longevity fix, the Social Security and Medicare taxes on payrolls should be indexed at the same percentage benefits are indexed. This would fix the revenue stream into Social Security.

The monetary authorities, at the behest of and in concert with the national political leadership, create and nurture inflation. If Social Security was not indexed, the large senior citizen voting bloc would quickly vote the spendthrifts out of office and put in stewards of fiscal responsibility in their place. Social Security was not inflation indexed until 1975. Indexing was a direct result of Lyndon Johnson’s “Guns (Viet Nam) and Butter (Great Society)” debacle. Congress took the short-term solution, inflation index Social Security, without any thought of the long-term consequences. If the taxes were indexed at the same rate the benefits are indexed, the irresponsible elected officials would be pressured to be more fiscally responsible. Why doesn’t someone in Washington lay out the issue completely and show the logical fix to this situation?

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I don’t understand why Senator Dan Sullivan, a US senator from Alaska, said on television after being briefed by the administration that the military scrambled fighter jets and recon planes to look at the Chinese balloon before it crossed over Alaskan airspace. With the recon planes, authorities would have known the balloon’s capabilities, yet someone either on the base in Alaska (doubtful) or at the Pentagon in Washington (likely) gave the order not to shoot it down. To deflect from their error, the administration is now saying there have been several Chinese balloon incursions into our airspace over the last six years, i.e., also during the Trump administration. They indicate that Pentagon officials knew of these incursions but failed to notify the White House. If the military did know of these incursions while they were happening (if they happened) and did not tell the president’s national security team, the entire senior military leadership during the last six years should be removed and forced into retirement.

We should use the billions of dollars being sent overseas for other countries’ border security to complete and repair the border security in this country. Why? America has had three-plus generations of citizens who do not know the seriousness and deprivation of a country at war. Our leadership of the last 33 years sent our military to war without being fiscally and morally responsible for its inept military excursions. We are entering an era when an external enemy with the hatred of the US has the capabilities to wreak havoc in the continental US. The four enemies of our country—Russia, Iran, China, and transnational criminals—have been emboldened by our political turmoil, wokeness, and anarchy in our major cities. This is an ideal time for the Republican Party in Congress to demonstrate their ability and willingness to take the country forward. Unfortunately, all they are doing is wasting time on “investigations” that will spend money and go nowhere. On November 6, 2024, the day after the next presidential election, Republicans will again have been told by the American voters that it is better to have a spendthrift Democratic government that at least gets something done than to have a Republican government that doesn’t do anything but talk, talk, and talk some more.

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I don’t understand why the immigration lobby in Washington is so powerful, it forces the administration to allow immigrants to flood into this country illegally. The legal immigrants coming in are approximately 221,000 annually. The illegal ones are 10 times that amount. Most of these illegal immigrants are military-age males. The federal government, nongovernmental organizations (NGOs), and frustrated governors have scattered the caught illegals all over the country.

That’s not a good situation; however, the real concern must be for the 900,000 illegals that deliberately eluded the authorities and melted into this country during 2021 and 2022. They worked carefully to avoid being detected. Why? It is likely the majority of the “gotaways” were also military-age males? Compare that to the size of the entire US military forces, 1.18 million individuals. In the past, I alluded to the undermining of the Philippines before WWII by infiltrated Japanese personnel as immigrants. Is it not far-fetched to believe a portion of these individuals who willfully evaded authorities work for and were trained by transnational crime organizations or other governments? At one point last year, most illegals were coming from Cuba and Nicaragua, both socialist countries with disdain for the US. Illegals have been documented as coming from all areas of the globe. Is it far-fetched to believe a wealthy foreign government would negotiate a deal with these same transnational organized crime groups and pay them to commence a stealth guerrilla war on our soil, at a time the same foreign power is making hostile moves against our allies?

Think about the number of urban disturbances going on now. Think about the number of “accidents” happening to infrastructure today. Mercenaries are being used in the Ukraine war by both sides. Mercenaries have been used in most wars. If there are 900,000 illegal immigrants who deliberately evaded capture, can anyone say they are harmless and not mercenaries? Today, some elected leaders in Washington are calling for using our military to take on the Mexican cartels. Really? Perhaps they should educate themselves about how these organizations are organized. It doesn’t take secret data to know how transnational crime organizations are structured around the world. These organizations are smart and compartmentalized even though they are spread over a wide area. Sending a million-dollar missile to destroy a cartel fentanyl factory? These factories are usually one poor peasant farmer who makes pills in his barn or shack to be picked up by couriers weekly. Blow one up, and another will take its place.

Finally, in the last two week, the US government said it doesn’t have enough money to operate surveillance blimps on the US southern border. How is that even logical? Who doesn’t want what is happening to be seen? Why is the administration deliberately making it easy for our sovereignty to be undermined? If the congressional cowboys of both parties want to do something with the military, put troops at the border to check each and every vehicle, and have the intelligence agencies trace the flow of bribe money from the border up to Washington, DC, and Mexico City. Who exactly, in both countries, is being enriched by our lack of border security? Who exactly is benefiting from this deliberate undermining of our sovereignty?

As I said, Alice in Wonderland best describes the world and country today. The good news is the condition is usually self-correcting after much pain and sorrow.