Sunday, May 24, 2015

Is America The Greatest Country Ever?

We were driving around town at the beginning of Memorial Day weekend and started to notice how few American flags we saw on the front porches of homes in the various neighborhoods.

So we immediately went to Ace Hardware to buy a new bracket for our flag and went home to put it up about 30 minutes later. We were embarrassed that we had not put the flag holder on our home earlier.

We'll give everyone the benefit of the doubt and give everyone at least until Monday to get their flags out to honor our men and women who have served in our nation's military throughout history.

Roughly 1.36 million soldiers have died in combat since the Revolutionary War started in 1775, half of whom died from disease or complications from wounds suffered in battle or from unsanitary medical attention after battle.

Close to half of those soldiers died fighting the Civil War on both sides. More soldiers died in the Civil War than in all other wars America has fought combined. Think about that for a moment.

1.36 million soldiers dying in battle or from wounds after the battle sounds like a lot until you consider that roughly 545 million Americans have lived in the United States over those 240 years. (Odd fact: over 1/2 of the number of people who have ever lived in the United States of America are now currently still living)

0.25% of the entire population of Americans who have ever lived in this nation have made the ultimate sacrifice to protect our freedoms, notably of which is the freedom of speech for us to say whatever we want about our government, elected leaders, military, teachers, economy and religious beliefs both good, bad and indifferent.

We owe every service person, not only those who died but those who survived as well an enormous debt of gratitude not only this Memorial Day weekend but every day of our lives. Shake a hand of a serviceman or woman when you see one in an airport or buy them a cup of coffee if you see them in a Starbucks and tell them how much you appreciate their service and sacrifice for the rest of us. They always smile and say they appreciate it very much.

All this got us to thinking about the negative comments made about America from many sources lately, much of which seems to stem from this current White House for some reason.

We have been waiting patiently now for 6 years to see President Obama break out the champagne, wave the flag high and wide and extol the virtues of America in a speech or at some commemoration or other in a way that makes everyone burst with pride to be an American.

Maybe not quite like Ronald Reagan, George Bush 41 or 43 did with country music singing and all that but at least enthusiastically waving an American flag or something. We did a brief Google search to find ANY picture of President Obama waving even a teeny tiny American flag at a baseball game on the Fourth of July or something and we could not even find a picture of him waving an American flag anywhere of any size for the past 6 years. Isn't that more than a little weird that the President of our United States can't be found in one single photo during a cursory Google search waving an American flag?

Type in 'President Obama waving the American Flag' and see if you can find a picture of our President waving an American flag of any size at at any event while President. Sort of really odd, isn't it?

Maybe we have missed his flag-waving but we haven't missed many of his proclamations about America. While respectful, his speeches about America always seem to be moderated with some jab at successful business people or Christians or free enterprise or capitalism or some aspect of American life that he just does not seem to like for some reason or another. A President of the United States of America should at least be our Head Cheerleader-in-Chief, shouldn't he?

With that in mind, we thought we would ask this provocative question to ponder this Memorial Day:

'Is America the greatest nation to live in ever in recorded history?'

Let's take a brief look at some of the things we can be thankful for about living in the American Democratic Republic and see if we can't all be flag-waving patriots this Memorial Day:
  1. Name any other country in world history where free enterprise, free speech, freedom to worship and freedom to assemble has combined to pull as many people out of poverty and into standards of living most other countries can only dream about.

    Hundreds of millions of Americans over the last 240 years have literally either pulled themselves up by their bootstraps or had their bootstraps pulled up for them by the free enterprise system. Tradesmen who once used to work 7 days a week, 16 hours a day in back-breaking work were able to move up the economic scale by adopting new technologies and machinery to make better products at lower costs which led to better lives for them and their children.

    The number of Americans who have been able to pull themselves up the economic ladder far exceeds the number of people who have been relegated to a life of dependency on government programs. We do far better as a nation when we can brag about how many people are now working instead of counting the increasing number of families who have to live on food stamps, for example. A person does not climb the economic or social ladder of success by relying solely on government assistance. They do it by work and taking advantage of educational and tutoring, mentoring, coaching and apprenticeship opportunities when they present themselves.

  2. Name any other conquering nation or empire in history that regularly went into other nations, help them repel and extinguish the worst invaders anyone could ever imagine...and who then left on their own accord back to their home country.

    We have asked dozens if not hundreds of historians or people interested in history this question and so far, no one can come up with one example of any other nation or empire which has gone into other countries on a regular basis to help them win their freedom and left of their own accord.

    Rome didn't do it. If you saw the Roman legion coming into your neck of the woods in Gaul or Egypt, you could hang your sovereignty and independence up on a clothesline because your days as a free nation were soon going to be over.

    Same with the British Empire. The Ottoman Empire. The Visigoths. Alexander the Great. The Chinese Dynasties. The Assyrians. The Persians. The Turks. The Mongols. The Spanish. The Dutch. The Portuguese. The Soviet Union. Germany under Hitler and the Kaiser before him. Japan under Hirohito. Iraq under ISIS.

    None of them went into a nation to help set them free...and then left of their own accord. If they were forced to leave, it is because someone else pushed them out as they came in to occupy the country for themselves.

    The historical trend over millennia has been for a conquering nation to stay in the host country and keep them subjugated and conquered so they could access their natural resources and squeeze every ounce of tax revenue and tribute out of the working people of the land.

    The United States stands alone as an exporter of freedom and democracy the world over. Could the United States have stayed in Europe after World War I and especially after World War II and basically annexed all of the nations America had set free from the scourge of the Kaiser and later Hitler? Could the US have stayed in Japan and treated them as a protectorate of the United States after World War II? How about after Korea in 1953? Could the US have stayed in power there and run the nation for as long as we could possibly want?

    Instead, we provided military protection while we lent them money and expertise to rebuild their nations. Germany, Japan and Korea are economic powerhouses in the 21st century almost solely because of American loans, government foreign aid and assistance, Marshall Plans and the freedom to build a new nation under democratic principles and free enterprise and capitalism.

    Somewhere along down the line of history, some future historian is going to uncover the history of America from some dusty archive buried under the sands of time and is going to think he has discovered a mutant form of human life. 'No one else in history would have ever entered another nation and helped them defeat a common enemy and then left to go back home!' he would write. 'The United States of America must have been the figment of some dreamers' imaginations!'

    Which it was when you think about what the Founders wanted to do at the Constitutional Convention in Philadelphia in 1787.

  3. If you want a pretty good gauge of how great it is to live in America versus almost every other country on Earth, consider this: Even a disturbed individual such as Lee Harvey Oswald, who hated America with a passion, defected to the Soviet Union so he could join his 'happy' (sic) comrades in communism only to find out communism was not all that it was cracked up to be (it was miserable even according to Oswald).  Life in the Soviet Union was so bad that even an American hater such as Oswald begged to be allowed to come back to the United States shortly before he assassinated President John F. Kennedy on November 22, 1963.

    What a mistake that turned out to be, yes?

    Many other nations around the globe are deliberately and systematically homogeneous in terms of race and religious belief which tends to make it 'easier' for them maintain the sense of order and control they desire for their country. Japan is mostly made up of Japanese people; China is made up of mostly Chinese people. Finland is 93.5% Finnish for goodness sakes! There are only 1500 Jews living in Finland today out of a population of over 5 million people.

    You like freedom and diversity and inclusion and assimilation? Welcome to America! You are gonna get all of those here in far higher proportions than any other country on Earth.

  4. Finally, if you want to see how great other nations are when it comes to allowing dissent or
    1989 Tank Guy in Tiananmen Square, Beijing, China
    protests and being 'free to express yourself' as we do in America, ask the young man in Tiananmen Square in Beijing who stood in the way of a long line of Chinese tanks in the summer of 1989.

    If he is still alive, that is.

    Ask the millions, perhaps hundreds of millions of people over 19th and 20th century history, in Russia and China or Uganda or Rwanda or Cambodia who were purged by their dictator leaders for their dissident views, namely their opposition to the dictators in control if they thought their countries were 'the greatest ever' in the history of the world.

    Ask the gay people in strict Muslim countries who have been killed because of their sexual orientation if they think living under Ayatollahs and ISIS and Al Qaeda psychopaths was all that great before they were put to death solely because they were gay.

    There are hundreds of millions of women all over the world who are abused and mistreated by men and powers-that-be in their countries who would literally give everything they owned to live in the United States for one minute of their lives, much less have the chance to go to school, college, become a lawyer, doctor or businesswoman or simply to marry the man of their choice and raise a family on their own.
We don't have any idea if living in the 'Glory of Rome!' was all that is was cracked up to be in the movies or in the glorified history books. We think living in Rome or in ancient Athens in the glory days of the rise of philosophy and the arts in Greece must have been a great experience, assuming you were a wealthy male of appropriate birth and standing in the community, that is, and not a slave or a women or a foreigner or outsider for some reason.

America has warts and foibles today, there is no questioning that. We are not a perfect utopia and we do not live in a state of nirvana, that is for sure.  America has made many mistakes and created many problems over the years here and abroad either intentionally or not. Many of which we are now trying to figure out and put back into Pandora's Box if we can before it is too late.

However, we think any reasonable person can take an objective and fair long-term look at the balance scales of history and the positive impact America has made in the course of human endeavor in life on this planet, and have to conclude that living in America is far better than not living in America for the past 240 years.

If not, why do so many people still want to come here to live?

You still have time to go get an American flag today and put it on a post in your front yard high for everyone to see. America still has a lot going for it, contrary to what you may see and hear on the nightly news every day.

Namely you and others who care enough about it to do something to preserve it for our future.

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Tuesday, May 19, 2015

Want to Build Wealth and Retire Rich?

'Want a 'minimum wage' retirement or a 'Park Place Retirement?'
As hard as it is to believe, we recently received some information about 'retiring early' to receive Social Security benefits.

How can that possibly be? It seems like just yesterday we were running for Congress in 1984 talking about reforming Social Security and setting up individual retirement accounts for everyone.

A senior political advisor took me aside one day and said: 'You have to stop talking about reforming Social Security! You are scaring the hell out of the other Republican candidates on the ballot!'

'But it has to be done!' I responded in an exasperated youthful idealistic impatient impudent manner.

'We all know that it has to be changed!' the senior advisor said. 'We just don't want to talk about it in THIS campaign!'

Therein lies the problem. That was 31 years ago in 1984. Today it is 2015, heading into the 2016 presidential election cycle. Nothing has changed. Nothing has been improved. Both SS and Medicare are headed towards technical and actual insolvency based on past legislation about who pays what into each 'trust fund' (sic) and who receives benefits from each 'trust fund'.

When the out-flow of SS/Medicare exceeds the inflow of SS/Medicare payroll taxes, you know something is terribly wrong and it is unsustainable.

There is NEVER going to be the perfect time to talk about reforming Social Security and Medicare in America. Not with 44 million+ senior citizens receiving checks and benefits every month from both monstrous entitlement programs. Who vote every election. State, local and federal. Even in off-off year primaries.

Maybe the tactics of Social Security reformers in the past has been all wrong. Instead of talking about 'preserving and protecting Social Security', maybe it is time to start appealing to the inner desires of every single human being, rich, poor and neither rich nor poor but middle-income, especially those of you who are under the age of 30 right now and ask this basic visceral question:

'How would you like to retire rich and wealthy through the magic of compound interest and with very little work on your own?'

Who could possibly say 'NO!' to that one? Everyone wants to do well on their own and provide for themselves and their families, don't they?

Any political party that can adequately market this to the younger cohorts of American voters, and then get them sufficiently motivated to vote consistently mostly on the issue of reforming Social Security to their personal benefit , will certainly dominate for the foreseeable future.

Here's the problem in a nutshell:

  1. Under the current old SS model, people who were early recipients of SS from 1935-1989 or so made out like bandits in terms of 'return on investment', i.e. their payroll taxes paid over their working lives versus what they received in actual SS benefits during their retirement years.

    Parents and grandparents who entered the SS system in 1935 or so could expect to pay a maximum of $40 or so...per year. Not per month. per year. The next year it might rise a whole $1...per year to $41/year and so on. Many received that amount and much more including any assumed rate of interest in perhaps 3 years of retirement.
  2. People who entered retirement from 1990-present or will enter retirement up to 2020 or so will enjoy a modest rate of return on their 'investment' (sic) (again, i.e. payroll taxes paid which are not really invested capital) relative to what they put into SS. 1-2% average return is all they can expect.
  3. People who retire after 2020 will be lucky to receive a zero rate of return over the course of their retirement, meaning they will be lucky if they live long enough to get back every dollar they have paid into SS over their working lives of 45 years or so before they die.*
Guess what? If you die before you reach the SS full retirement age of 66 today (which is heading up to 67 in a few years so get prepared for it), you get bupkis, nothing, nada from Social Security. Hasta la vista and too bad for you and all that.

It doesn't have to be that way. For any American, black, white, Asian, Hispanic, rich, poor or otherwise.

Now that we are faced with the reality of looking at such things as receiving Social Security (?) checks on an early basis, the stark facts of the lack of reform for the past 35 years are becoming glaringly self-evident.

The average person can expect to receive about $1300/month in SS benefits in full retirement assuming they worked most of their lives and paid into Social Security every pay period. The max a person can expect to receive is about $2600/month no matter how much you made in salary because of the various limits on payroll taxes and benefits.

The thought of Warren Buffett or Bill Gates receiving a monthly SS check of $2600 is almost too ridiculous to believe. They don't need it and they shouldn't be counted as an 'entitled' recipient just because they reach the golden retirement age.

If you think you are going to be making it big off of Social Security when you retire, think again. You are not.

The real tragedy of American politicians and voters not supporting a rational improvement to Social Security 35 years ago or longer means that most American seniors are going to receive close to a 'minimum wage retirement' instead of the amount of wealth they could have amassed had they been able to put the same amount of Social Security payroll taxes into a bonafide individual retirement account over the past 3.5 decades.

It is difficult but not impossible for a minimum wage worker for the entirety of their working life (only 2% of the people who start at the minimum wage stay at that level for the long-term) to build up a $1 million nest egg to retire on at age 65. (see How to Become a Millionaire on Minimum Wage)

If you don't want to retire with a $1 million+ nest egg and you want to make sure everyone retires at the lowest amount of monthly income possible and you are under the age of 30, just keep voting for people who promise to 'never touch Social Security!'....and you will achieve your goal.

The real shame of it is that with a private individual retirement account such as the one described above, everyone could have a decent retirement fund on which to retire PLUS, they could pass it along to their heirs AT ANY AGE THEY PASS AWAY, NOT JUST AFTER AGE 66!

This would be especially important to African-American males whose life expectancy today is about age 68 versus their white counterparts who live on average 77 years.

If an African-American male pays into Social Security their entire working lives and dies 1 minute before midnight before their 66th birthday this year, he won't receive back any Social Security benefit.  His family will not inherit any of the accrued value of his Social Security 'contributions' (sic) (i.e. again 'payroll taxes') built up over the previous 45 years of hard work and forced taxation under the current system.

How fair is that?

Think about that the next time you think defending the status quo in Social Security is 'the right thing to do'. We most likely have created one of the most unfair ways to hold people and families back imaginable in America by not updating and modernizing Social Security over the years.

It is like we are still driving our grandparents' 1935 Ford instead of a modern-day Prius or Tesla. You wouldn't do that either, would you? So why are you still supporting the old version of Social Security when there are more modern ways of providing for income security for our nation's seniors going forward?

* information from the Green Book published annually by the House Ways and Means Committee

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Thursday, May 14, 2015

Remember When Adults Used to Govern Via OBRA, COBRA and TEFRA?

'If you know how to charm the COBRA,
you can get a lot done in Congress'
Of course you don't. Unless you are like ancient nowadays.

Consider this your history lesson for today if you are under the age of say, 40.

The first time one of these species called an 'omnibus reconciliation bill' (OBRA to begin with) was used to address the American fiscal situation in earnest was 1980.  If you are now turning 40 years of age, you would have been all of 5 years old back then so there is no way you could have appreciated what was going on back then when adults used to run Congress, the US Senate and the White House.

Believe it or not, there used to be a time when Harry Reid was a nondescript junior senator from Searchlight, Nevada who had very little impact on much of anything in the US Senate. As were almost all of the remaining US Senators who are still serving in the Senate today who were elected prior to 1988. (Leahy, Hatch, Cochran, Grassley, McConnell, Shelby, Mikulski, McCain)

Senators and Congressional Representatives back then actually cared about things such as the budget, the budget deficits and the national debt. They were not always successful in addressing them but to solve them, you have to at least first 'care' about them, yes?

You might be seeing more about the 'budget reconciliation' process emanating out of Washington in the coming months so we thought you might want to know what it is before the press distorts its relevance and importance as they always seem to do with weighty important issues that affect all of us.

'Budget Reconciliation' came out of the 1974 Budget and Impoundment Control Act passed under President Nixon as a way to bring some semblance of sanity to the even-then chaotic congressional and presidential budget process.

Imagine what it was like before then. 435 Members of Congress plus 100 prima-donna 'POTUSes-in-Waiting' US Senators and a President all haggling over the spending priorities for the coming fiscal year of the US federal government....without a common budget process or order to follow?

It would have been like everyone in a large family in the kitchen at the same time throwing all sorts of expensive stuff into the communal stew, with everyone wanting 'someone else' to pay for it, of course.

After this bill was passed, the hope was that Congress and the US Senate would act like adults and set forth spending priorities each year for the nation and suggest the 'ways and means' to pay for it. (which is why the oldest committee in the US House is called the 'Ways and Means Committee' by the way)

The bill followed the Constitution to a T in the sense that it called for a concurrent budget resolution to originate in the US House and then be passed by the US Senate...and that is it. No signature by the President to pass it into law. No possible veto.

It did call upon the executive branch to present a budget each year, mainly because it was the funnel where all federal agencies could make their budget requests known to the elected leaders in the White House and on Capitol Hill and then the President would submit it to Congress in total.

Where, more times than not, it would be declared 'DOA' or 'Dead on Arrival' by whichever opposition party was controlling either the House or the Senate or both at the time.

So far, so good. At least Congress would have a general budget target to shoot at and, in reality, agree with 95% of the time which meant they could spend the rest of the year fighting over that last 5%.

Once Congress passed the budget resolution, instructions were to be sent to Authorization and Appropriations Chairmen that outlined the overall amount of money their committees would have to spend in the upcoming fiscal year on federal programs that came under their jurisdiction and oversight. (The key instructions were the amounts sent to Appropriations Chairs since that is where the real money is spent and allocated each year. Authorization Committees just oversee and monitor programs for all intents and purposes)

That is where the fun begins. Or at least used to before Majority Leader Harry Reid essentially shut down the entire annual budget process for the previous 6 years. No budget resolution; no budget reconciliation process; no budget control in essence.

With the Supreme Court considering the healthcare subsides this summer and the fact that now with Republican control of the Senate and House again where they have already passed a budget resolution, you need to understand how budget reconciliation might play out this summer and fall.

Here's a very helpful and informative article by our friend James Capretta, 'Remember Reconciliation?'  which points out the simple truth that under budget reconciliation rules, as long as it involves the raising of revenues or changes in spending, both of which affect the raising or lowering of deficit projections, a simple majority of 51 is necessary to pass the bill as opposed to the 60 needed to shut off debate in the Senate via cloture.

Read it so you will at least understand the basic outlines of how budget reconciliation used to work in the days of OBRA I, 1980 and then II,III (Omnibus Reconciliation Act) and on up to about OBRA X; COBRA 1985 (Consolidated Omnibus Reconciliation Act) and later, TEFRA (Tax Equity and Fiscal Responsibility Act of 1982 which, according to many people wound up being neither)

The great thing about OBRAs is that they actually allow our elected Congresspeople and Senators to act like the statesmen they all say they want to go to Washington to be and we all want them to be for the good of the nation. It might be complicated but under OBRA rules, the very programs that are causing our deficit nightmares, entitlement programs, especially Medicare, Medicaid and to some extent, Social Security, can be dealt with in huge bills under the cover of night when everyone is exhausted.

It is the only way any elected official in Washington will ever be able to tackle these monstrous spending programs and get a grip on them through reforms and outright spending reductions in certain programs.

We, for example, proposed $177 billion in Medicare/Medicaid spending reductions from the proposed spending baseline in the FY 1993 Budget Alternative on the House Republican Budget Committee out of a total of $500 billion in 5-year savings.

When the 1997 Balanced Budget Act finally passed, $135 billion of those savings remained in the final form that passed Congress and was ultimately signed by President Bill Clinton.

Guess what? There is not one person you can talk to this week who could tell you what reductions were represented by $1 of that $135 billion in flattened spending in either Medicare or Medicaid over the 5 years from 1998-2002. In the grand scope of things, those spending reductions/reforms just did not amount to any onerous or dangerous cuts to essential entitlement programs as many on the left would have everyone believe.

Budget Reconciliation is a budget tool you should be looking forward to and supporting this year. Tell your elected representatives and senators they should learn to use it too.

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Monday, May 11, 2015

What Have We Learned During the Obama Years About The US Economy?

'You see, Sherman, the economic policies of former
President Jimmy Carter were an unmitigated disaster.
You Millennials do not want to repeat them.'
We talked recently with the bright young man who is going to work for the Federal Reserve this summer as a followup to our last post about the uncharted waters we are now navigating in the post-2008 Crash/2009 Great Recession years under President Obama.

The main thing we were glad about was that we did not interpret anything he said to us in an egregiously wrong manner. He said he has been reading economics books since the 7th grade because he 'loves this stuff' and apparently the folks at the Fed felt like he was good enough to come help them this summer.

We'll leave aside the question of what kind of 13-year old loves reading dry, dusty tomes about the 'dismal science' and just leave it at that. We are glad there are people such as him and Ben Bernanke who do 'love this stuff' so they can figure out how to get out of messes such as the one we face today.

During the course of the conversation, it became apparent that the Fed has been scratching their heads at a lot of things, not just the expanded balance sheet.

Apparently, the past 6 years has stood a lot of economic assumptions economists and policy-makers have held dear and sacrosanct over decades straight up on their heads. Meaning the past 6 years have pretty much disproved almost all that was taken for granted before 2008.

Such as:

  1. Low interest rates will lead to much higher economic activity in both the personal and commercial sector. (Not. Interest rates are effectively near or at zero and we have not had the economic boom most economists otherwise would have expected)
  2. Low inflation rates will lead to much high economic activity in both the personal and commercial sector. (Not. Inflation rates are effectively at or near zero real rates of inflation and we have not had the economic boom most economists otherwise would have expected)
  3. High budget deficits will 'crowd-out' other borrowing and lead to higher interest rates across-the-board (Apparently not true as well. Maybe there is not enough borrowing going on in the private sector for interest rates to be pushed up by the government competing for funds nowadays, who knows?)
Every one of these shibboleths were held as the gospel truth by conservatives in the 1980's through 2008. High interest rates and inflation rates during the Carter years through Reagan's inaugural year in 1981 were held responsible for the dismal job market and economic recession that, at the time, was the worst since the Great Depression.

'Fiscal insanity' in the form of 'enormous budget deficits" ($79 billion in 1981) and a 'huge' national debt ($789 billion held by the public in 1981) was leading the United States into 'financial ruin'. Which led to the landslide election of Ronald Reagan over President Jimmy Carter with the highest number of electoral votes ever by a non-incumbent presidential candidate (489-49)

If there was a time machine, and we could go back and tell President Reagan and any other candidate who ran for office in 1980 that our current budget deficits would 'only' be $486 billion and our national debt would be almost $14 trillion held by the public (over $18 trillion when intra-government debt is considered), their heads might literally explode.

There is something else going on during the Obama years and it could be as simple as the following things:
  1. The labor participation rate has plummeted to its lowest level since the Carter years, 1980, meaning that fewer adults of working age who can work are choosing to work. Many are Boomers who entered the workforce in the 70's who are now retiring in massive numbers between 2010-2022. However, many are older workers who were laid off during the Great Recession and have not been able to find meaningful work since then so they take early retirement or go on disability in amazingly high numbers relative to past experience.
  2. Many businesses are being very cautious about how many people they do hire in the wake of Obamacare and the myriad of new regulations that have spewed forth on the America workplace since President Obama got elected. A recent report suggests that the Dodd-Frank banking legislation alone will cost the US economy up to $1 trillion in lost economic output in the next decade.
Both of these could help explain the sluggish job market where even a number announced last week for new jobs created in the month of April, 223,000, was considered sub-par for what is needed to get everyone who wants to work full-time back to work.

The stunning thing about the lack of robust job growth during the Obama years versus the Reagan years is the simple fact that the civilian work force is about 50% higher today than it was in 1980. It stands to reason that with over 50 million more people in the age groups who to want to work, the job creation under President Obama in a recovery would be at least the 300,000 jobs per month that were created during the recovery period under President Reagan in his first term from 1981-1985. (See Bureau of Labor Statistics)

Yet, it has not been even close to those numbers during the Reagan years. How can a population with 50% more people in it who want to work in 2015 not create more jobs per month than were created in 1982, 1983 and 1984 at the very minimum?

The next presidential election is going to be important (they all are) but especially important for the young college graduates who entered the dismal job market in 2009-2012, millions of whom are still trying to find that meaningful job for them on a full-time basis that will make full use of their interests and talents.

Many Millennials have already lost up to 6 years of full pay/salaries in their careers, 6 years where they could be putting away savings in investment vehicles that will compound over time in a far more impactful manner than any amount of money they can sock away in their 50's, for example.

So does that make who becomes the next President very important to your future, Millennials? Ask anyone you know who started working in the Reagan years if they wished that there could have been 'four more years' of President Jimmy Carter and his failed policies.

They'll tell you right away.

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Monday, May 4, 2015

The Federal Reserve: In Unchartered Territory

'Let me see if I fully understand QE3
and the Federal Reserve expanded
balance sheet..'-Sir Isaac Newton
We had the occasion recently to catch up with a recent college graduate friend of ours (we have trained hundreds now in The Institute for the Public Trust) who is now in the last year of his Ph.D program in statistical economics, whatever that is.

He is a gifted advanced mathematics person with a great sense of humor and interpersonal skills, which is rare for most statisticians and economists we have met over the years, truth be told.

Economics is the 'dismal science', you know, as coined by Thomas Carlyle in 1849. Many economists we heard in testimony on Capitol Hill sounded more like mortuary owners to be honest about it. They have predicted 10 of the last 3 recessions goes the old saying so they come by their characterizations naturally.

We asked him what he was doing and he said he was going to work for the Federal Reserve this summer. Not bad for a bright young recent college grad to be working at one of the most important and powerful quasi-government agencies.

He is interested in markets and since the Fed is where all the transactions are made for the issuance of new America debt, they have asked him to come in and do some research on how these markets are behaving now. Which stands to good reason since, as we have written about many times now, there always comes a time in any nation's economy where too much debt issued starts to cause a major problem for the host country and the time to head those problems off is way ahead of that day of reckoning, not after the collapse of the currency has started to happen.

So far, so good. We always want to see and encourage bright young people to enter public service on the behalf of the rest of us, simply because that is what our Founders did by example as a model they wished for the rest of us to follow.

So we asked him if any of his internship would cover any of the 'expansion of the Fed balance sheet' we have heard so much about and in a brief flurry of comments, this is what he said:

'The people I have interviewed with say that we are in uncharted territory in this regard and we have never done anything like this before in American history. They say there is really a great degree of uncertainty about what the right plan of action is to reduce this expanded balance sheet.'

'So they are asking you to come in and help them, is that what I am hearing?' I had to inquire.

'Well, yes. Sorta. Yeah, mostly. They are hoping for a fresh perspective on things' he said.

'You know, I know you are a smart young feller and all that. But if the US Federal Reserve is bringing in fresh young Ph.D doctoral candidates, especially ones I know and like and whom I know spent a whole lotta time drinking beers (at Players, Players Retreat, He's Not Here, Mitch's Tavern, take your pick) during their undergrad days, that doesn't give me a whole lotta confidence that this is going to end well!' I told him honestly.

That is like that old saw you used to hear when people would say the scariest moment in your life will be if you are wheeled into an emergency room and the doctor takes off his mask before performing surgery on you and he says: 'There ya go now. Don't worry about anything. It is me, Sharky. Your fraternity brother from college. Just leave everything to me' as you drift off into an anesthetic state remembering all the crazy things he did at the fraternity house during his four years there.

Here's something not many mere mortals on earth have ever read, much less ever known about or heard talked about: The Balance Sheet of the US Federal ReserveGo ahead; read it and see if you can make any sense of it on the first reading.

We are not going to even fake trying to understand all the intricacies and cash flows of the Fed in this short of amount of time. We have spent 5 years and close to 600 posts so far trying to boil down the intricacies and confusion of the US federal budget to an essential gruel that can be ingested by most people and understood over time and the Fed is just a horse of a very different color we believe.

Take a look at this chart though if you want to see how alarming the 'expanded balance sheet of the Fed has become in a very short amount of time:

From the onset of the Great Recession in 2009 to today, the Fed Balance Sheet expanded from a historical 'normal' rate of about 6% of GDP to almost 20% of GDP in a very short amount of time. Current estimates of the expanded balance sheet are about $4 trillion.

What does this mean for you, the average Joe Citizen of America?

Not much. Unless you consider the fact that finding the exactly right solution is akin to Tom Brady throwing a football the length of the field and threading the needle through the out-stretched arms of 3 tall cornerback defenders into the safe arms of one of those short Patriot receivers in the corner of the endzone in the last second to win the Super Bowl.

It 'can' be done. But the chances of it being done perfectly is very, very slim indeed.

We'll try to find some more explanation on reducing the Fed's balance sheet and try to parse this out some more since it will affect us all one way or the other. Countries that have tried to 'expand their balance sheet' and 'expand their money supply' to avoid some current economic crisis have inevitably awakened the inflation demons in the past so don't get too comfortable with the next-to-zero inflation and interest rate environment we have been stuck in the last 6 years.

Some European nations have gone so far as to issue 'negative interest rate' bond instruments meaning you give them $1000 of your money to hold in safe-keeping...and you get back $975 of it after some specified length of time. Think about that for a moment if you think we are in 'normal' economic times.

So keep in mind the comments of our young friend as you go about your day. We hope he is a savant on the order of magnitude of an Isaac Newton who, in the very brief span of 18 months in his young life on a relative's farm from 1665-1667 where he was sent to avoid the scourge of the Black Plague in London at the time, discovered the basic principles of calculus, optics and gravity. In less than 18 months.

Our young friend is going to need that same supernova explosion of new ideas to grapple with the Fed's expanded balance sheet and how to get us through it without igniting the fires of inflation that have accompanied every other expansion of money in history.

'Godspeed, John Glenn' is all we can say.

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