Financial Market Fragility

The recent meltdown in the British Gilt market that provided the rationale for the Bank of England to intervene in the markets by buying government bonds has raised the question now being asked rather uneasily by policy makers: could the same thing happen in the US ? 

Of course it can. In fact it’s a virtual certainty unless steps are taken to reform both US fiscal policy, financial regulations and US financial infrastructure. 

A dreary recitation of the numbers that describe the state of the public fisc has a tendency to fall on deaf ears, probably because various warnings have been issued for decades but disaster hasn’t arrived yet, or has been averted in the short term. But that is only on the surface. Putting off reform now just disguises the real cost of our fiscal folly and ultimately makes it more costly than it needs to be. 

The truth is we have a structural deficit that will not be ameliorated by mere tactics. Under the current policy regime unsustainable growth in debt and deficits are baked into the cake for the foreseeable future.  The deficit and accumulated debt will retard economic growth and make solving the problem more difficult. 

Consider the current state of affairs and projections for the future absent significant policy changes. According to the Treasury  Borrowing Advisory Committee (TBAC) accumulated Treasury debt has doubled since 2015 and, according to the CBO is projected to reach 180% of GDP by 2050. This will require increasing ownership of Treasury securities by the private sector reaching about 25% by 2030. (See the graphs below). 

By definition that means that funds that would ordinarily go to the private sector, where they could fund investment, are going to the public sector where they mostly finance income transfer. These income transfer programs discourage savings and therefore investment needed to finance economic growth. 

The biggest liabilities are in Social Security and Medicare. They contain unfunded promises to pay benefits of $60 and $100  trillion respectively, expressed in terms of present value. Those numbers, which dwarf accumulated Treasury debt of about $30 trillion, are off balance sheet. But off balance sheet or no, the Treasury needs cash to pay beneficiaries.  

That’s one reason why the increasing fragility of financial markets   is becoming problematic. With the rise in inflation to 40 year highs, the Fed has been aggressively raising interest rates.  They have already raised overnight rates about 3 percentage points and before the end of the year those rates will probably be around another 1 % higher. Intermediate and longer rates have also risen about 3.5 percentage points in anticipation of additional Fed tightening. 

But while rates have risen along with Treasury financing requirements, bond dealers have pulled in their horns. According to the Treasury Advisory Borrowing Committee, bank capital has fallen sharply as a percentage of Treasury market size.  

In November of 2008 during the cataclysmic events leading to the Great Recession, bank capital was about 22% of publicly held Treasury debt. Now it’s a shade under 5%. Similarly, over the same time period, primary dealer transactions in Treasuries fell from about 14% to 2% of outstanding Treasury securities. (See the accompanying graphs.)

At the same time, there has been a substantial pick up in Treasury market volatility and diminished market liquidity.  Data from JP Morgan, shown in the graphs below, illustrate a rapid rise in Treasury market volatility and corresponding fall off in market depth. 

This is where the rubber meets the road.  Theorists can argue all day long about what type of stress the market can handle. As a practical matter though, Treasury needs to sell securities to finance all the spending that Congress has ordered. And someone has to buy those very same securities. Standing between those buyers and sellers is the dealer community. 

There are 25 primary dealers in government securities. Primary dealers are authorized to trade with the Fed. They also serve as market makers and make underwriting bids at Treasury auctions. According to data published by the Federal Reserve of New York, the top quintile of dealers—5 in total—account for about 50% of dealer transactions in Treasuries. The top 10—which includes the 1st and 2nd quintiles—account for about 75% of the volume. 

The current weighted average maturity (WAM) of outstanding Treasury debt is about 74 months. The weighted average duration (WAD) of the debt is about 5 years. The CBO projects yearly deficits north of $1 trillion for years to come. If we take into consideration rolling over the existing debt along with financing deficits of $1 trillion plus for the foreseeable future, then we are talking about something in the neighborhood of $6 trillion worth of Treasury securities being sold through the dealer community every year for a very long time. 

Remember there are only 25 dealers and 5 of them account for about half the trading volume. That means there will be about $500 billion worth of Treasuries every month being marketed by a very small number of players. And keep in mind that bank capital as a percentage of outstanding Treasury debt has been dropping like a stone. Also keep in mind that primary dealer transactions in Treasuries now constitute a mere 2% of outstanding Treasury debt, down from 14% a little over a decade ago. Combine that with a sharp rise in volatility and with shrinking market depth and we have the recipe for a financial calamity. 

Could a meltdown like the one in Britain happen here? Sure it can. The elements that could touch it off are present. All it needs is a spark. The wise course would be to begin to reform our budgeting processes and strengthen our financial infrastructure before there is a spark. Which means that substantial policy reforms are due now, before it’s too late. 


The Midterms come to PA

We are about 3 weeks away from the midterm elections and to date there has been very little by way of substantive discussion of policy by the candidates. On the other hand, there has been extensive posturing, sloganeering and bad argumentation, heavily influenced by insights gleaned from analysis of focus groups.  

So let’s talk about Pennsylvania. The results from the Keystone State will be particularly interesting, but not because control of the Senate rests with Pennsylvania voters. It doesn’t. The results will be interesting because there are two elections in Pennsylvania that couldn’t be more different. The gubernatorial race pits a genuinely moderate Democrat (Josh Shapiro) against a tin-foil hat Trumpkin Republican (Doug Mastriano) who insists that the 2020 Presidential election was stolen.  

For example, Mr. Shapiro has come out in favor of a private-school choice bill that passed the Republican controlled Pennsylvania state house with only 1 Democratic vote. He is in favor of lowering corporate taxes and spending more money on police. He also disavowed at least some of outgoing governor Tom Wolf’s restrictive Covid policies. 

But Shapiro is not exactly an Eagle Scout. He and his allies spent something like $840,000 on ads designed to help Mastriano secure the Republican nomination, the theory being that Mastriano would be a relatively easy opponent to beat in the general election. Leaving aside the ethics of this, it does make all the rhetoric about the supposed threat to democracy more than a little bit suspect. 

On the other hand Mr. Mastriano appears to be a true believer. He is all-in on the laughable Trump claim that the 2020 election was stolen. This is where we get into tin-foil hat territory: Mastriano appears to actually believes this nonsense. It isn’t just posturing. At the very least this indicates that his prudential judgement is deeply flawed—and that is being charitable. If he really believes this baloney he certainly doesn’t belong in the Governor’s chair.  

Mastriano’s policy positions tend to be on the rightward cultural edge of conventional Republican politics. But his rhetoric tends toward the inflammatory; you might say Trumpian. And his rhetoric suggests that at the very least he is a bit off. One writer from the Atlantic referred to him as “a nutjob”. 

It is hard to really pin Mastriano down because he avoids direct contact with the press; his campaign is full of innuendo, and the press, which obviously favors Shapiro, interprets Mastriano’s pronouncements in the least favorable light.  So it is difficult to tell what he is really all about. That said, the available evidence suggests the Atlantic writer is probably correct: Mastriano is  nuts. 

Compare the gubernatorial race with the Senate race. Like the gubernatorial election there is no incumbent. That’s pretty much where the similarity ends. In the gubernatorial race the vacating governor is a Democrat; in the Senate race, the retiring Senator is a Republican. 

The Democratic nominee, lieutenant Governor John Fetterman, clobbered his moderate rival, Connor Lamb, in the Democratic primary. He has staked out positions on the far left of the progressive wing of the party. You might say that he is firmly in the AOC camp. 

He is, for instance, in favor of a $15 minimum wage; he is opposed to fracking, although he is trying to soft-pedal earlier remarks. According to his website he is going to hold Washington “accountable” through his 5 point “plan” which is quoted below.

Mr. Fetterman’s plan includes this gem: “All across Pennsylvania we’re seeing soaring prices, hollowed out communities, getting ripped off by corporate greed.” 

Here is his 5 point plan to fix things:

  • Make more sh*t in America (This is a direct quote including the spelling).
  • Cut taxes for working people
  • Ban Congress from trading stocks
  • Slash “out of pocket” health care costs
  • End immoral price gouging

We have come to expect politicians to say stupid things. And John Fetterman has jumped into the stupid sweepstakes with gusto. 

Fetterman’s positions are so extreme or pointless or both that he and his handlers have decided to make the campaign about abortion and identity politics. He has taken to wearing a sweatshirt emblazoned with a “John Fetterwoman” Logo that is supposed to emphasize his support for abortion rights. 

Funny thing though, in the end abortion regulation is going to be decided by 50 state legislatures, not the Feds so if he is really all that interested in furthering abortion rights he would be attempting to do so at the state, rather than federal level. But he isn’t. 


Because on top of being a buffoon (see the 5 point plan above)  he is also a hypocrite. He makes a big deal about his working class sympathies, spent years as Mayor of a small working class town and best of all he routinely outfits himself in a pair of shorts and a hoodie. As the stenographers that make up the political press put it: He wears this outfit Even in winter! Well, Holy Smoke: How’s that for street cred?

So let’s talk about the publicity machine that Fetterman built over the years as a way to create a persona that bears little resemblance to the actual person. Start with the working class bit, and grant the log cabin routine is a perennial in American politics. 

John Fetterman earned his first paycheck—other than the $150 per month he earned as Mayor—when he was 49 years old. That paycheck came from his job as Lieutenant Governor. Until then he  was supported by an allowance funded by his wealthy family. Like most working class people he earned his bachelors degree from Albright College; his MBA from the University of Connecticut and his Master’s in Public Policy from Harvard’s Kennedy School. 

After his sojourn at the Kennedy School he ran for Mayor of Braddock, PA and won. There he stayed from January 2006 until January 2019 when he became Lt. Governor of PA. 

After his election as Mayor of Braddock, Fetterman launched what Wikipedia calls “a failed campaign to attract new residents to the area from the artistic and creative communities.” He also initiated other revitalization efforts. They failed as well. 

Today Braddock looks pretty much the same as it looked when Fetterman was Mayor. It has a tiny population of about 2,000 people. Median household income is about $18,500; per capita income is only about $13,100 according to US Census data. Some 35% pf the population lives below the poverty line including 54% of those under 18 years old. 

On top of all this, Fetterman suffered a stroke a few days before the primary. His campaign covered up the extent of the damage for as long as it could, but eventually the details began to emerge as they almost always do. It turns out that as a result of his stroke, Fetterman has problems processing spoken words and so he insists on using a closed captioning aid when he has the rare interview. 

NBC News reporter Dasha Burns quizzed Fetterman the other day about the state of his health now and noted that Fetterman had not released his medical records relating to the stroke. She also reported that it”…wasn’t clear [Fetterman]was understanding the part of their conversation when he didn’t have the aid of a captioning device.”

As social justice warriors are wont to do, the Fetterman campaign immediately went on the attack in an effort to intimidate anyone who would dare to question the bona fides of the candidate. They wheeled out his wife, Gisele Fetterman, who announced the interview left her “in a rage”; accused the reporter of doing a disservice to journalism for the “appalling” report which was, she maintained appalling to the entire disability community. Then for the coup de grace she urged that there be “consequences” for the reporter. 

Note that the argument quickly went from “nothing to see here; all is fine” to an argument that questions about the candidate’s health status are all of a sudden off-bounds.

That about sums it up. Candidate Fetterman is a fraud as well as being a failed Mayor, a policy buffoon and hostile to the first amendment. The only thing he’s got going for him is that he is running against—Dr Mehmet Oz.

Dr. Mehmet Oz is a celebrity celebrity doctor and political neophyte endorsed by Donald J Trump. In the Republican primary Dr. Oz beat David McCormack, a hedge fund manager, by about 1,000 votes. 

Unlike Fetterman, Oz doesn’t try to hide either his wealth or background. Disclosure forms indicate his wealth is over $100 million, and could be multiples of that. He was born in Turkey (he holds dual citizenship), went to Harvard for his undergraduate degree and the University of Pennsylvania for both his MBA and MD degrees. 

Much has been made about his wealth, largely a function of the money he makes as a reality talk show host, and his upper class tastes. The Fetterman camp, for instance, has made a big deal about Oz referring to crudités, insisting that “real” Pennsylvanians use terms like veggie platter. Why that should matter, other than a crude appeal to envy, is beyond me.  

That aside, Oz has descended into promoting medical quackery. An article published by McGill University’s Office for Science and Society documents Oz’s fall from respected surgeon to circus barker. For example, Oz has championed “energy medicine” for which he won the Pigasus Award. It is an award that, as McGill puts it, recognizes achievements in pseudoscience. 

He has hyped diet pills without any evidence they actually work. He has apparently lent credence to the idea of talking to the dead. And he has relentlessly hyped his “Dr. Oz’s homeopathic starter kit” which is based on using non-existent molecules  to treat real diseases. 

Among other things, Oz has suggested that there are dangerous levels of arsenic in apple juice (there are not); that green coffee is a miracle cure for obesity (it isn’t) and has hinted that genetically modified  foods are cancer causing (they are not). 

Lest anyone think these are mere political hits, reeking of bias, the AMA Journal of Ethics took him to task for the coffee and obesity claims back in 2017 when Oz was playing at being “America’s Doctor”. That was  well before Donald Trump—or anybody else—came up with the idea of Oz  running for the Senate.

So there you have it. Pennsylvania has a pair of wealthy frauds running for its open Senate seat; in its gubernatorial race a moderate Democrat is facing off against a Trumpian election denier. What to make of it?

My guess is that Shapiro, the moderate Democrat will convincingly trounce the election denier Republican Mastriano, for the Governor’s office. On the other hand, Oz will narrowly defeat Fetterman. If Oz wins the contest, the spread between the vote totals of Shapiro and Fetterman will capture the attention of analysts. 

To the extent that Shapiro wins convincingly and Fetterman loses (or perhaps just squeaks by) the conclusion will be that a moderate Democrat can be formidable in a blue-collar swing state. At the same time a defeat for a far-left Senatorial candidate would suggest that voters in the Keystone state are looking for moderation in their politics. 

There is a certain irony in all this. To the extent that Democrats have focused their attention on abortion, the race that matters most to them is (ore should be) the race for the statehouse. In the wake of Dobbs v. Jackson overturning Roe v. Wade, abortion regulation will be decided at the state level, not the national level, absent a Constitutional amendment. The Governor’s race is therefore more important in that respect. 

The Democrat’s focus on nationalizing abortion regulation has also left them extremely vulnerable. While 2 months ago abortion concerns were among the top priorities for voters, now those concerns have fallen to about 4th or 5th place, behind, inflation, crime and the economy in general. 

If, instead of running on local issues, the Democrats lose their bet on nationalizing abortion regulation, what is left for them to run on? Abortion will have lost some of its salience in the national debate and the Democratic Party infrastructure will be left in tatters. 

One last note. In some ways, the Georgia Gubernatorial and Senatorial elections are a mirror image of Pennsylvania. More on that in a future post.


On to the Midterms

The Democrats have built an impressive suicide machine which, by all accounts, they intend to deploy for the midterm elections. This theory contradicts the conventional wisdom—a conventional wisdom that was horribly wrong in 2016 and 2020. Horribly wrong in that Donald Trump won in 2016 despite prognostications of a Hillary Clinton landslide. Horribly wrong in 2020 in that Republicans generally outperformed the polls while President Biden underperformed them and barely managed to squeak through to capture the White House. 

The way the 2022 midterms are shaping up, a repeat performance is distinctly possible. The Republicans may very well repeat their outperformance of conventional polls and recapture both the House and Senate. Such a result I might add, has little or nothing to do to do with any semblance of a coherent Republican strategy, which is largely non-existent. 

Consider for instance the abortion controversy. For about 50 years Republicans have argued that Roe v. Wade was (1) badly decided and (2) that abortion regulation was a matter for the states decide. Well, along comes the Supreme Court with the Dobbs v. Jackson decision overturning Roe on substantially the same grounds that the Republicans have argued for lo these 50 years. But in the wake of Dobbs, despite the fact that it was leaked months in advance, Republicans were caught flat-footed. 

They simply have no talking points.  As in the Obamacare debacle they have proved to be much better at running against something rather than actively positing a better way. In the abortion battles Republicans have gone into a defensive crouch. In so doing they have allowed Democrats to frame the issue, however incorrectly, to their political advantage.  

Democrats posit assertions that have only a passing connection, if any, to the truth. Things like assertions that the Court under the prodding of Clarence Thomas is setting the stage to overturn Loving v Virginia, a decision that found prohibitions against interracial marriages unconstitutional. Thomas, by the way is guilty of the unforgivable crime of being black and having a white wife. 

Then there is the risible assertion that birth control will be declared illegal. (Note here that some Republicans have urged that birth control pills be sold over the counter in the face of Democratic resistance.) Also consider the charge that some states will make it illegal to treat Ectopic pregnancies and other medical emergencies without the ability to legally perform an abortion.  Not so, as Alexandra DeSanctis points out in an exhaustive survey of abortion regulations in all 50 states. (See the article here.)

Most amazing of all is that Republicans have allow radical abortion rights activists to frame the Court’s decision as anti-democratic. This, even though the Supreme Court pointedly returned the issue of abortion regulation to the democratic process via state legislatures. It was in Roe that the Court cut out the political branches and short circuited the democratic process. And by the way, the Supreme Court was deliberately designed to be an anti-majoritarian institution whose remit is to interpret what the law is rather than to make it up as they go along.  The Supreme Court is thus supposed to serve as a bulwark against mob rule in order to protect liberty. 

One would think that a political party that possessed  organizational and political skills only slightly superior to the average Cub Scout pack would have been prepared for this sort of  onslaught. But not the Republicans. They were left staring at their shoes like the kid in the 6th grade who got called on in class when he didn’t do his homework. 

This is political malpractice on a grand scale. The Party spent 50 years inveighing against Roe and when the Supreme Court finally got around to agreeing with them, Republicans were left speechless. 

Not only that,  Republicans managed to nominate a whole lot of Trump backed candidates whose chief claim to fame is their willingness to kiss the Trump ring.  As it turns out, the Republicans did this did with substantial assistance from the Democratic National Committee (DNC) which was busy lending backhanded support for these Trumpians on the theory that they would be easy to beat in a general election.  So much for the alleged “threat to our Democracy™ ”. That said, it is important to recognize the uncomfortable fact that Trumpian candidates won because Republican primary voters selected them as their champions. 

Nevertheless it is my opinion that the Republicans are likely to have a strong enough showing to recapture both Houses of Congress. The reasons are several. (1) The Democrats are fooling themselves if they actually believe the American people want the radical left wing agenda of the Party to be enacted. (2) The Democratic vote is highly concentrated whereas the Republican vote is more spread out. Consequently where the Democrats win, they will tend to do so with “excess votes” that would have served them better elsewhere. (3) Wide variations in state polling results indicate substantial  variation in polling methodology, but not necessarily voter opinion. 

As for point 1 (above): The overwhelming majority of polls give the Biden Administration very poor marks on inflation, crime, managing the economy and border control. Further Biden himself gets very low marks, ranging between 39% and 45% approval, on how he handles his job. It is hard to believe that voters are looking for more of the same. That is why Democrats continually attempt to change the subject. 

The potential fly in the ointment is (surprise, surprise) none other than Donald J Trump. The Democrats would love to keep him front and center.  Donald Trump would love to be front and center. If Trump and the Democrats manage to keep him as the center of attention, there is a reasonable chance of holding the Democratic majority in the Senate and possibly the House. It all depends on how destructive Trump will be. And since he is simply seeking revenge he could be quite destructive. Absent that, the Democrats are going to get buried. 

Let’s consider point 2 (above). It is true that polls pitting  generic Republicans and Democrats against each other are fairly tight with some momentum toward the Democrats, probably attributable to Dobbs. But take a look at the distribution of poll results. While the  overall results are tight, the distribution of the results tells a different story. 

In Congressional districts rated at least somewhat competitive by ABC’s FiveThirtyEight, registered voters preferred Republican candidates by a stunning 55% to 34% over Democratic candidates. However, in heavily Democratic districts Democrats are favored by 35 percentage points.  This suggests that (1) Democratic votes are very concentrated in districts where they are likely to win anyway,  but (2) they are losing the race by substantial margins in the competitive swing districts that will determine control of Congress.

Now let’s turn to the 3rd point above that references polling methodology. Most, but not all polls, seem to show improving Democratic chances after a dismal summer. For instance Patty Murray is generally thought to be the overwhelming favorite in Washington state. In mid September one poll had her up by 12 points.  But recently the Trafalgar group had her up only 2 points—within the margin of error.  In Arizona two polls had Kelly beating  Masters by 8 to 12 points. But the Trafalgar group has the spread at only 2 points—again within the margin of error. (The polls were conducted 5 days apart). 

Trafalgar points out what he considers important differences in methodology that skews results. First, state polls tend to have small sample sizes. However, Trafalgar uses sample sizes of at least 1,000. Second, other polls tend to be rather long. His are short. He argues that people who take the time to respond to a long questionnaire tend to be political junkies who are systematically different from most voters. 

Third, he contends that cancel culture and a routine demonization of Republicans has forced some underground. Consequently they are hesitant to respond to pollsters even when they are assured that their answers are confidential. They are concerned about being “outed” as conservative and are worried about both their jobs and standing in their communities. As a result Trafalgar contends, Republican votes are being systematically undercounted in polling results. 

If Trafalgar is correct, and I believe he is, then the Republicans are going to capture both Houses of Congress in the midterms absent a dramatic new development. 


Blowin’ in the Wind

Yes, and how many years must a mountain exist

Before it is washed to the sea?

And how many years can some people exist

Before they’re allowed to be free?

Yes, and how many times can a man turn his head

And pretend that he just doesn’t see?

The answer, my friend, is blowin’ in the wind

The answer is blowin’ in the wind

From “Blowin’ in the Wind” by Bob Dylan

© 1962 Warner Brothers Inc; renewed 1990 by Special Rider Music

Note that the song was copyrighted in 1962, years before Command-and-Control became the dominant ethos of political elites. Back in 1962 Dylan could ask “How many times can a man turn his head and pretend that he just doesn’t see”? He knew he was stirring some consciences while shaming others.

But since then, shame has gone out the window. As has the idea of telling or recognizing the truth. Now we have “My truth”. We have pregnant people and birthing people, not mothers. We have people “Who identify as…”. 

Remember the violence of the summer of 2020? That was when we had “mostly peaceful” protests. Or the violence of January 6, 2021? Republican wordsmiths quickly tried to re-characterize it into a patriotic rally that got a little too enthusiastic. Then there was the suppression of the Hunter Biden story shortly before the November 2020 elections, wherein the NY Times, the Washington Post, Google, Twitter and Facebook just pretended not to see.  

Then there was the breathless coverage (“the walls are closing in”) of the phony Steele dossier—a brazen lie that the Democrat—Media complex marketed for years as if it were gospel truth. Not to mention the adoring coverage Dr. Anthony Fauci received even though he is an admitted liar and his agency, the CDC, proved to be inept even on its best day.  

Add to all this the crime wave that is now engulfing the nations’ cities; a crime wave that is directly attributable to the campaign to defund the police along with the refusal by some big city prosecutors to enforce the law.  On the subject of refusing to enforce the law, let’s not forget the Biden Administration’s carte blanche refusal to enforce laws that regulate the border. 

And let’s not leave out the continuing collapse in public school enrollment coupled with a surge in homeschooling and private school enrollment. Add to that an inflation rate precipitated by out-of-control spending that has been financed in good measure by the Feds’ reckless expansion of its balance sheet. 

As if that were not enough, the Congress decided to spend even more on a green energy bill that is mostly corporate welfare. It will have a negligible effect, if any, on global warming but that was never the point.  The point was to Do Someting, no matter how stupid. Needless to say the bill passed on a straight Party line vote before heading off for Biden’s signature.  

But let’s not stop there. After deciding to hand out a minimum of $500 billion to a valued constituency (young upscale voters) via student loan forgiveness, which he had no authorization to do, a few days later Mr. Biden actually said “…me and my Democratic friends (sic) on the Hill are working to expand and protect [Social Security]”. Expand an insolvent program. Just what we need. Then before resting, he called the Republicans “semi-fascists” whatever that is supposed to mean.

Mr Biden has been busy in foreign policy too. After assuring Americans that a withdrawal from Afghanistan would not bring about a precipitous collapse in that country, the withdrawal did precisely that. The United States abandoned thousands of Green Card holders to their fate, al-Qaeda re-established itself there, and Taliban rule was re-instituted just as it was before. Mr. Biden called the evacuation an “extraordinary success”. 

In the meantime the Administration continues to be played by Iran as it seeks to re-open the nuclear deal abandoned by President Trump, originally negotiated by President Obama. For its part Iran has attempted to assassinate John Bolton on US soil, and has made it clear that it wants UN nuclear inspectors removed. And, oh yes, since Iran refuses to speak to the U.S. directly, the U.S. has to use a go-between for the negotiations. That go-between is none other than Russia.

That is the very same Russia that invaded Ukraine in February of 2022—6 months after we abandoned Afghanistan. As it now stands we have funneled over $40 billion in military aid to Ukraine. But nowhere have we heard a word about what our goals and objectives are; nor have we been told what would constitute success. We are just in the business of pouring money into Ukraine without defining what the end game is. Meanwhile, after the sanctions we placed on Russia, they are taking in substantially more energy revenue than ever before because of rising prices. 

The war appears to be frozen in place and Europe, dependent on Russia for energy, is beginning to feel the crunch which will only intensify as long as the war continues. This is a consequence of Europe’s strategic dependence on Moscow which is a direct result of its attempt to convert to a green energy economy. It is an attempt that is doomed to failure, and one that the US is foolishly trying to implement as well.

I could go on. Suffice it to say that roughly everywhere you look there is obvious policy failure. Crime is exploding, inflation is soaring, economic growth is beginning to stagnate, the schools are failing to educate. In foreign policy the US has attempted to placate rivals like Iran while leaving allies confused about our resolve. In Ukraine we allowed ourselves to be trapped in a no-win situation. And we have not yet even begun to have a serious conversation about the position of the US vis-a-vis China. 

And yet, despite the blindingly obvious failures of the progressive  policy regime, we continue to be bombarded with the same propaganda over and over again, without a hint of reflection, thoughtlessly delivered by the mainstream media. But the failures and are blatant and the defense of the indefensible gets more and more implausible, insistent and hysterical on a daily basis. 

These policy failures are all linked by a reliance on command-and-control, bureaucratic group-think and what is surely a vain attempt to rule from the top down rather than accept the reality of the impossibility of doing so successfully. All of which depends on the willful blindness of citizens who would rather conform to current fashion than to ask the hard questions.

Which sends us back to the question Bob Dylan asked back in 1962. “Yes, and how many times can a man turn his head, And pretend that he just doesn’t see?”

That is a question that still needs an answer 60 years on. 


About Those Student Loans…

In the run up to the November midterms, does anybody really believe that the Democratic Party generally and the Biden White House in particular, are making good faith arguments for their policy positions? If so, it may be worth considering the recent Biden decision to unilaterally cancel student loans up to $10,000  and Pell grants up to $20,000. 

For years Democrats argued (correctly, if a bit sanctimoniously) that then President Donald J Trump had no respect for the rule of law, and that he eviscerated norms necessary for the proper functioning of civil society. And what did President Biden and his party do to re-establish the rule of law and democratic norms? They continued in Trumpian fashion, to trash both the rule of law and democratic norms. 

There is for instance, no one this side of sanity who actually believes that Mr. Biden acted lawfully when he announced the cancellation  of student debt in the best tradition of Tammany Hall. It is blindingly obvious that Biden had no legal authority to do what he did. None. Zero. Nada. The hired guns who will be paid paid to argue that he does have that authority will be laughed out of court if the case ever gets there. 

Effectively, Mr. Biden just proceeded to spend about $500 billion without even a hint of Congressional authority, thus doing violence to the separation of powers that is the at the heart of our Constitutional order. In so doing, absent a stinging rebuke from the courts, he has managed to change financial market expectations for  government, for academic institutions and for consumer behavior—and  not in a good way.

What are the likely consequences of the Biden decision? Well, for one, universities will raise their prices to capture the lion’s share of the newly minted $500 billion subsidy. Government will borrow an additional $500 billion to pay for it. And student-consumers will have an incentive to delay paying off their loans on time, betting that another round of loan cancellations will be right around the corner. This will simply encourage the production of more bad behavior, which is to say moral hazard.  

And that’s just the beginning. Why would we stop at college loans? Why not cancel already heavily subsidized home mortgages? Or car loans? Or credit card debt? Or small business loans? What makes college loans so special compared to those other forms of debt? Perhaps it’s because of the urgent need for more gender studies majors. 

All of which brings us back to the question in the first sentence of this essay. Does anybody truly believe that Biden and the Democrats are making their arguments in good faith? When they passed the $1.9 trillion American Rescue Plan, they did so on a Party line vote while dismissing the idea that it would increase inflation. But by March of 2022 the Federal Reserve Bank of San Francisco released a paper that estimated the inflation impact of the American Rescue Plan was about 3 percentage points. 

By that time the Democrats, with some notable exceptions like Larry Summers who was far ahead of the curve, were arguing that inflation was merely transitory. But after having increased spending by $1.9 trillion, they then decided to raise tax rates which they implausibly claimed would raise $300 billion in tax revenue. The effect, they argued, would be to —wait for it—reduce inflation. And a few weeks after that, Biden decided to cancel about $500 billion in student loans on the books, thus increasing aggregate demand which will of course be financed by more borrowing. 

So in sum they argue that (A) $1.9 trillion in spending, financed by borrowing and the Fed’s printing press had no effect on inflation. However, they go on to argue that (B) a tax increase on the order of $100 to $300 billion will lower inflation. But (C) an increase of $500 billion in spending and borrowing to finance the student loan give-away will have no effect on inflation. Got that?

Why would anybody take these people seriously?  More to the point, how can anybody believe that they are making good faith arguments? Clearly they are not, unless the underlying assumption is that they are hopelessly, invincibly ignorant. Unfortunately there is an awful lot of evidence to suggest that there is more than a grain of truth in that proposition. 


A Litany of Progressive Failure

Pretty much no matter where you look, Joe Biden and his fellow progressives have produced a string of catastrophic policy failures. In fact, a policy success—defined as something that actually produces a net benefit—is nowhere to be found. Which makes all the happy talk coming from the White House  somewhat puzzling. Unless the White House strategy represents a combination of cluelessness and prevarication. 

Consider the state of the macroeconomy. Based on the preliminary figures published yesterday, the U.S. just experienced two consecutive quarters of negative GDP growth—which is to say that the economy shrank for the first half of the year. Two consecutive quarters of negative growth is the basic definition of recession. But don’t take my word for it—take the word of Brian Deese, currently President Biden’s Chair of the National  Economic Council. 

Back in 2008 while acting as an advisor to Hillary Clinton, Dr. Deese said “Economists have a technical definition of recession, which is two consecutive quarters of negative growth.” But now that the Biden Administration is presiding over a recession brought on by poor policy, that definition doesn’t count anymore. Deese now argues that “Two negative quarters of negative growth is not the technical definition of “recession”. We are instead in “a transition”. See these Tweets.

It isn’t like this attempted sleight-of-hand is a one-off.  It is has become standard procedure for progressives as they vainly try to explain away their cascading policy failures. Take the inflation problem for instance. At first they denied that inflation was on the rise. Then when the evidence of rising inflation became indisputable they defined it as merely “transitory”. Biden’s chief of staff, Ron Klain, tweeted that inflation was a “high class problem” not something we should worry about.  

Now that inflation, and expectations for future inflation threaten to embed themselves in the American psyche, the Biden brigade has all of a sudden become a rhetorical  inflation fighter. Not that they will actually do anything to alter the destructive policies they implemented that contribute to inflation. Not at all. They continue to press on with regulatory policies that constrain supply, particularly with respect to fossil fuels, thereby placing upward pressure on production costs and prices.  

But that is not all. The supply side of the equation is only part of the story. The demand side is important as well. The first villain of the piece is the Fed which fell way behind the curve. Their failure to raise interest rates much earlier in the cycle allowed inflation and inflation expectations to take root. Just as important was the Fed’s decision to rapidly expand its balance sheet by buying trillions of Treasury and mortgage-backed securities. 

This monetization of the debt had the effect of letting Congress off the hook. Congress would no longer be constrained in its financing needs by the bond market; the Fed proved to be the ultimate price-insensitive buyer. From March 2020 to  June 2022 the Fed increased its holdings of longer dated Treasuries from just over $2 trillion to about $5 trillion. (See the Peter G. Peterson Foundation for these data.) And these figures don’t include TIPS or mortgage securities. If you want to know why the long end of the Treasury market has held up as well as it has despite soaring inflation—this is why. 

Let’s not stop with the macro-economic disaster engineered by utopian progressives. Let’s take a look at some other domestic policy “accomplishments”. There is for instance the “defund the police” movement, accompanied by progressive district attorneys in deep blue cities (San Francisco, LA, New York) who refuse (or refused) to prosecute what most people would describes as serious offenses against public order. And plenty of deep blue cities did in fact reduce their police budgets. That was quickly followed by sharp upward spikes in often violent crime and public disorder. That’s the very definition of policy failure. 

How about eduction? Using the pandemic as an excuse, the Teachers Unions in Democratic strongholds successfully advocated for public school closures and lockdowns of various kinds—with teachers salaries being paid, of course. The net effect was tremendous learning loss and mental health problems among young people, the social implications of which are only now coming to light. 

In the meantime, as more and more social science papers are published analyzing the impact of all this two things are becoming crystal clear. First, school closures and lockdowns had virtually no impact on the spread of COVID. Second, low-income students suffered the most from learning loss and mental health problems. 

In the meantime, there has been an exodus from the public schools to private ones and to home schooling. Private and parochial schools that (mostly) stayed open during the pandemic did not have statistically different COVID outcomes, but they did have learning and mental health outcomes that were generally superior to their public school counterparts.

Parents took notice both of this and something else as well. That something else was what their children were being taught in school—which was not just reading, writing and arithmetic. Children in public schools were being indoctrinated in the latest academic fads. Parents could see what was going on in the classrooms compliments of Zoom and they didn’t like it one bit. That spurred a revolt that got Glenn Youngkin elected governor in Virginia and a first time ever Republican polling advantage in education to the tune of 20 points. 

By almost any measure, progressive educational policy has been a catastrophic failure. 

Let’s not forget the Southern border. Since Biden took the oath of office, there has been a consistent and significant rise in illegal border crossings. Early in the game President Biden argued that the increase was merely seasonal. That lie was quickly exposed as illegal border crossings increased by record amounts month-by-month.  For the record, I happen to believe that we should have a much more open immigration policy and that Congress should enact one. But the President is supposed to enforce the law as it is written, not a policy regime based on wishful thinking. 

There is foreign policy as well. One year ago we were treated to the chaotic U.S. withdrawal from Afghanistan that the Biden Administration characterized as a great success. That withdrawal was carefully observed by Russia, China, Iran and a whole host of adversaries who justifiably concluded that Biden was a weak leader who could be easily pushed around. Six months later Vladimir Putin invaded Ukraine, starting the first land war in Europe since the end of WW2. 

What was the Biden Administration response? In a vain (and doomed) effort to stop the invasion the Biden Administration insisted on announcing to Putin what we would not do in response.  Further, slowly at first the Biden Administration began to send arms to Ukraine so it could defend itself. Then it imposed sanctions on Russia and some oligarchs. But the Administration has failed to enunciate an objective for all this. If the object was to stop the invasion, it failed. If the object was to dethrone Putin–that has failed as well. If the object is to defeat Russia, it’s hard to see how that is going to happen when Russia still possesses a whole lot of nuclear weapons.

Some politicians in the U.S. — House Speaker Nancy Pelosi (D. CA) comes to mind—have insisted that “victory” is the only possible outcome. Victory is, of course, undefined. President Biden himself has characterized Putin as a war criminal and opined that Putin should not remain in power in the Kremlin. As usual his staff was quickly deployed to backtrack.

Now the war in Ukraine is apparently stalemated and frozen place. If so, that leaves the U.S. in the position of constantly supplying weapons and intelligence to the Ukrainians with little hope of resolution any time soon. In the meantime Russia is making far more from its energy exports than it did before the U.S. imposed sanctions. And Russia has significantly tightened the spigots on the Nord Stream 1 pipeline to Germany, squeezing their economy and its citizens. In the meantime, some German cities, Hanover especially, have begun to ration hot water as a countermeasure. As measures like these inevitably expand, it is hard to see how the U.S. is going to maintain solidarity with its sanctions partners. 

Especially as the U.S. goes hat-in-hand to places like Venezuela and Saudi Arabia pleading with them to produce more oil even as the U.S. restricts fossil fuel production at home. Needless to say, Saudi Arabia not only refused Biden’s entreaties but also publicly humiliated Biden who had promised to make the country a “pariah state”. 

Meanwhile according to news reports Biden and China’s Xi Jinping have told aides to begin planning for an in person meeting. Even so, China is increasingly aggressive in its rhetoric about Taiwan. In the interim the Biden Administration, weak in the knees as usual, is leaning on Speaker Pelosi to cancel her planned trip to Taiwan so as not to displease Xi. 

When all is said and done, the Biden record of being on the wrong side of every question remains unblemished. It is replete with policy failure. Moreover it is difficult to identify a single policy success that truly is a success in that the benefits exceed the costs.

We have another 2 years to go with this ward heeler. The challenge we face today is to first contain the damage.  Then begins the long hard work of rebuilding our institutions, repairing the culture and re-establishing rationality and limited government. It’s going to take a while.


Time to Move On

The effort by influential Democrats to dump President Biden and open the field for other party leaders in time for the 2024 Presidential election is in full stride. Naturally enough, the media that spent the better part of 2020 – 2022 protecting Mr. Biden from his own unforced errors has thrown him under the bus. The proximate cause is Mr. Biden’s sinking poll numbers. 

For instance, yesterday’s New York Times ran with a front page story (headline above the fold) that read “Most Democrats Don’t Want Biden in 2024, New Poll Shows”.  Meanwhile today’s New York Times has a front page headline that reads “Half of G.O.P voters Ready to Leave Trump Behind, Poll Finds”. All of which presents undeniable evidence of the patently obvious: American voters have had their fill of both Donald Trump and Joe Biden. 

The real question is what the landscape will look like in the post Trump – Biden world. That’s where it gets interesting, because as the Republicans head for the exits of the Trump-Biden era, Democrats cling to it. 

It is crystal clear, for instance, that the Trump era cost Republicans dearly at the national level. Core Republican voters, e.g., —college educated suburbanites, were (and are) put off by Trump’s Barnum-and-Bailey style narcissism and and all its associated baggage.  Nevertheless he managed to recruit plenty of formerly Democratic blue collar voters as he executed a hostile take-over of the Republican Party. The result is the internal war currently underway in the Republican Party. A war in which traditional (small government) Republicans are showing occasional signs of life, but time will tell.   

On the other hand, the Democratic Party has staked its future on Donald J Trump. How so? While maybe 50% of registered Republicans show evidence of distaste for Trump, somewhere in the vicinity of 100% of progressives, liberals and partisan Democrats despise him. The Democratic strategy is therefore obvious: Do everything possible to promote Trump backed candidates in Republican primaries; wrap Trump around any and all Republican candidates, and then wail about the Trumpian “threat to our democracy” TOD™ .  The problem is not just the hypocrisy. What if the strategy of backing (theoretically easily beatable) Trump Republicans backfires, and they win? Then what?

In the end though, sanity will likely prevail and the Democrats will be thoroughly eviscerated in November and we will have the joy of gridlock. 

That doesn’t mean that that the voters will have bought into any kind of Republican political theory. It will just mean that the voters will have rejected referring to “women and other pregnant people”; it will mean they are tired of high inflation; that they want to be able to walk the streets of their neighborhoods without fear of being assaulted; that they want prosecutors to prosecute those accused of committing crimes; that they want the public schools to actually teach basic skills instead of running indoctrination sessions (good luck with that). Mostly, they do not want the Commander-in-Chief to be an old man who is clearly not up to the job. 

Perhaps a resounding Democratic defeat will knock some sense into their heads, after which they can begin to recapture their party from the lunatics who run it now. But I wouldn’t bet against the lunatics. Perhaps a Republican victory will re-introduce a modicum of responsibility into the Party and its leadership. I wouldn’t bet on that either.  We will probably have to let the two Parties resolve their own internal battles in the run up to 2024. Then rationality may prevail. 


The Supremes Overturn Roe and Casey

Abraham Lincoln, April 6, 1859: Letter to Henry L. Pierce

“This is a world of compensations; and he who would be no slave, must consent to have no slave. Those who deny freedom to others, deserve it not for themselves; and, under a just God, can not long retain it.”

Substitute the words “unborn child” for “slave”.

What is simply astonishing about the reaction to the Supreme Court’s decision to overturn both Roe and Casey is the routine display of ignorance that pro-abortion partisans have displayed. Essentially the court ruled that the original case was wrongly decided; that Roe represented a violation of the separation of powers, and that regulation of abortion is a political matter that belongs in the hands of the political branches, in this case state legislatures. 

Naturally enough, the idea of returning policy decisions to the voters via state legislatures is now defined as a “threat to democracy”. Those pesky voters do have an annoying habit of ignoring woke ideology and voting the wrong way. So voters simply cannot be trusted with democracy. 

In the midst of the hysteria we are told that the decision to overturn Roe will eliminate the chance for woman to have a safe abortion. That is a flat out lie. It is a lie because there is no such thing as a safe abortion. One party to the transaction inevitably dies. And that party, the child in the womb, is the one who has nothing to say about the matter. Like slaves in the South, unborn children have no say; they are defined as anything but human beings who are entitled to the protection of law.

That is, after all, the point of abortion. We can go on and on about “social justice” and a “reproductive health” and all the other focus group tested euphemisms designed to disguise what the real issue is, but in the end it is about the deliberate taking of innocent human life. And pre-printed placard signs to the contrary, there is nothing in the U.S. constitution that guarantees the right of pregnant women to kill their unborn children. 

That said, it is important to distinguish between the policy question and the legal question. It should be clear to anyone who  actually bothered to read Justice Alito’s opinion on Roe that the legal question is a no-brainer. There is simply no reasonable basis for claiming a constitutional right to abortion. 

The policy question is altogether different. (For the record, this writer thinks that abortion, like racism, is an appalling stain on the U.S. promise of equality under law.) But that question is a matter for politics, which is to say that the issue will be settled in state legislatures, whose members are actually elected. 

That is certainly preferable to subservience to policy directives coming from a nominally apolitical Supreme Court. And let us not forget that the Supreme Court, like all U.S. courts, is supposed to be an anti-majoritarian body.  It is supposed to decide cases based on laws as written, not as the Justices wish them to be or how the latest poll in Real Clear Politics reads. Actually writing and passing laws and policy directives is the prerogative of the legislature. (The issue of executive orders that infringe on legislative powers is a subject for another day).

In any event, as the days and weeks go by the policy issues around abortion regulation will be decided in state legislatures in accordance with local prerogatives. In an imperfect world, that is how it should be. It is called federalism. 


The Coming November Slaughter

We are only 5 months away from the 2022 midterm elections and all indications are that the Democrats are about to be wiped out. Not just beaten; wiped out. The Party that controls the White House almost always loses seats in the first midterm, so with a razor thin majority the Democrats would normally be expected to lose their House majority anyway. But Democrats are working hard to turn a normal seasonal event into a Republican landslide.

Progressives, the drivers of the Democratic Party, are convinced that they will be punished at the polls if they don’t “get something done” by which they mean enact the Progressive wish list of policy proposals designed to make citizens ever more dependent on government incompetence. What is just fascinating about all this is that it is perfectly obvious to the community of the sane that the body politic just wants the Democrats to stop doing what they are doing. 

Consequently, all the Republicans have to do is stand around and pick up the pieces. It is probable—a near certainty—that control of the House will then revert back to the Republican Party. It is also likely that Kevin McCarthy will ascend to become Speaker of the House. (It is nice to daydream about Liz Cheney winning her seat, challenging McCarthy for the Speakership and winning, But that is not going to happen.) 

After the dust settles it is more likely than not that Mitch McConnell, one of a dwindling number of grown-ups in Washington, will once again become Majority Leader of the Senate.  But Republicans should wait before they start popping the champagne corks. Republicans are not going to get elected because they have an agenda they are running on. They didn’t even bother to have a party platform in 2020.   They are going to get elected because voters are going to throw the current crop of bums out. Republicans simply have to say “I am not a Democrat” and leave it at that. At least for now.

And why would that be? Well, the inflation rate has soared as has the crime rate. But President Biden is considering forgiving some student debt thereby stuffing more demand into a supply-constrained economy. Progressive prosecutors in deep blue cities are hesitant to actually prosecute crimes. So they have created an incentive for more of the same. 

In the meantime, supply chain problems continue and they are not going to go away any time soon. That is because, among other reasons, progressives are inclined to use government power to “solve” the problem they created in the first place rather than allowing flexible prices to work their magic. Even as we speak various “price gouging” bills are being introduced into the Congress by progressives. 

And then there is foreign policy. President Biden is being credited for his “deft” handing of the Russo-Ukraine war, by George Will among others. Actually though, a better word for describing Mr. Biden’s handling of the situation is inchoate. Three months into the war and the U.S. commitment continues to grow by leaps and bounds, without a hint of what the end game is or what our goals are. 

What happens, as seems probable, if Russia manages to capture most or all of the Donbas region of Ukraine? Does the Biden administration, which has put U.S. prestige on the line, have a plan to dislodge the Russian forces while still avoiding a nuclear exchange? What is the Biden Administration’s vision for the region (and the world order) when the war ends?  Russia is now blockading ports so that Ukrainian wheat can’t make it to market. Ultimately, the likely consequence is food riots in less developed nations. Then what?

And for all its bluster, the Biden defense budget barely keeps up with inflation, while the number of Navy warships  actually shrinks. Perhaps the Biden Administration thinks that China won’t notice. Or will forget about Afghanistan.

Thankfully, the voters are about to repudiate the Progressive agenda in a big way, but they are not about to embrace a Republican alternative. That’s because there is no Republican alternative. If Republicans want to make a difference and operate as a governing party they had better grow up, stop the nonsense about the “stolen election” and come up with a governing agenda. 

And while they are at it, tell Mr. Trump “Thanks, but no thanks”. 


Some Amazing Coincidences

The U.S. Inflation rate is currently around 8%, a 40 year high. 

Homicides rose 29% in 2020, followed by an additional 7% rise in 2021. 

The U.S. Border Patrol reported more than 1.6 million migrants along the U.S. Mexico border in fiscal 2021, the highest number on record and quadruple the prior fiscal year. 

Real (inflation-adjusted) wages have fallen 1.2% since December 2019. 

Real (inflation-adjusted) GDP fell 1.4% in Q1 2022. 

The average price of a gallon of regular grade gasoline at the pump  is $4.328, up 46% from 1 year ago. 

The U.S. money supply at the end of March 2022 was $21.8 trillion, up 10% from 1 year ago. From mid February 2020 when the pandemic first hit until the beginning of April 2022, non-seasonally adjusted M2 (the US money supply) rose a staggering 44%. 

U.S. covid deaths hit 400,000 on January 20, 2021. As of May 9, 2022, U.S.  covid deaths total 1,024,546 according to the worldometer. 

The U.S. exit from Afghanistan was an “extraordinary success” according to President Joe Biden. 

We are in the 3rd month of the war that Russia launched on Ukraine on February 24, 2022. 

Except for the “extraordinary success” of the Afghanistan withdrawal, none of these events are the result of Biden Administration policies. Jen Psaki and President Biden have assured us of that.