“Credit is a system whereby a person who can not pay gets another person who can not pay to guarantee that he can pay.” – Charles Dickens

K and I were in LA for two weeks at the end of February. We were visiting two of our three kids and our four grandkids. If you’ve ever spent time with toddlers and preschoolers, you know they are always drooling, sneezing, and coughing. And often their parents are too. (Well, not the drooling.)

This is because young children are incredibly good at catching colds and the flu, and very good at spreading them. Typically, they infect their parents, who are also relatively young and healthy. Then their parents spread the cold or flu to everyone they come in contact with.

Thus, it didn’t surprise us to be showing symptoms of the flu when we returned to Florida early in March. We spent a week with symptoms. Normal for me. K usually recovers more quickly. And we thought nothing of it.

Two weeks later, when I began researching the coronavirus, I wondered if we might have caught it. But we had been in LA several weeks earlier than it was said to have started there. So I ruled out that as a possibility.

At the beginning of April, I was reading articles suggesting that the virus might have come to America significantly earlier than the experts had been saying. I speculated that it could be true. We now know it was.

Two recent autopsies proved that the virus was in LA in January, as the victims died on or about February 5. And several more reports confirmed it, with cases identified in late January and early February.

That is good news for everyone. It means that the actual lethality rate of COVID-19 is, indeed, much less than the case fatality rate. In fact, a recent antibody study suggests that 5% or more of the LA population is or has been infected. And that means, as I’ve been saying from the beginning, the lethality rate is just a fraction of 1%.

And this is hopeful news for me and K. Those flu symptoms we had in early March might just have been a dose of coronavirus that our adorable grandkids were kind enough to give us. I’ll let you know after my serology test next week. Meanwhile, back to my exploration of the Corona Economy…

The Corona Economy, Part III

What the Media and Our Representatives Don’t Understand 

Last Monday and Friday, we talked about the general state of the US economy. We took a look at its P&L and balance sheet and concluded it was a bankrupt enterprise that is losing money at an astonishing pace.

2020 will be a watershed year for the US. In terms of the usual data points that measure economic health, it has already neared or surpassed numbers that are as bad as we’ve seen in 100 years.

Unemployment is as high as it was in the Great Depression. The GDP is shrinking quickly. Government spending is at historic highs. Tax revenues are tumbling by the trillions. The federal debt is $24 trillion and will grow by $6 trillion to $10 trillion by the end of the year.

Those are scary statistics. And not just for Americans. Notwithstanding efforts by some countries to achieve economic independence in energy and other vital resources, the global economy is inextricably connected. When any country in the world sneezes, the rest of the world catches cold.

Few in Washington or in the mainstream media are alarmed about this. The attitude seems to be: We’ll deal with it after we defeat the coronavirus.

In fact, an ethos has spread that is disturbing. Being worried about the economy means you don’t care about human life. I see a parallel to the way they responded to the threat of the virus in its early stages. “It’s nothing to worry about,” they said. “We should go about our daily lives without concern.” (It was not just the administration that took this position in January and February. It was the pols and reporters from both sides of the aisle.)

It’s only gotten worse since then. The reportage of the pandemic has been politicized. The right presents hopeful new data as reasons to open up the economy. The left interprets the data darkly and insists that the closure should continue.

One hopes a crisis would bring people together. The Corona Crisis seems to have done that in Italy and Sweden and some other European countries.  But in the US, the divide is wider now than ever. And the animosity is higher.

So we stay in lockdown to slow the virus and, therefore, insure a second and possibly third outbreak. And we spend trillions of dollars we don’t have to “protect” American businesses and workers, even though all the spending is putting us on the brink of an economic collapse.

And yet, economic collapse (which is happening at an exponential rate) is not being discussed with the alarm it deserves – particularly among left-leaning pols and the mainstream media. Some of that is surely due to political animosity. But I think a bigger problem is the widespread ignorance of the way our government gets and spends money. This is true generally of the population at large. But what’s disconcerting is that the ignorance is widespread among the politicians that do the spending and the media that report on it.

A Simple Question 

This takes us back to where we left off on Friday. We know that our government is broke. We know it doesn’t have huge stockpiles of gold and silver or even dollars. So is it able to pay for the $6 trillion to $10 trillion deficit we are putting ourselves into right now?

It’s a simple question. I recently posed it to a few of my smart and educated friends. I’m talking about doctors, lawyers, business executives, and college professors. None of them had any idea.

That’s understandable. In most colleges, economics (let alone government fiscal policy) is not a required course. But you’d think that government officials that vote on spending bills and reporters and columnists that write about government spending would be well-versed on the subject.

I don’t think they are. In fact, I believe most of them haven’t the foggiest idea about how our fiscal and monetary policies work.

But you don’t need to understand these things to be a politician, a political reporter, or a columnist. Nor do you need to understand them to be able to function in almost any career.

I believe I could have had pretty much the same career I’ve had as an entrepreneur and business consultant without a background in fundamental economics. But I do think that the experience of running a business and trying to squeeze a profit from it for many years has given me a good understanding of some of it. Such as:

* There are several ways to make money: You can earn it, you can steal it, or you can be given it. The first is the best of the three because it won’t land you in jail and because it’s not dependent on the kindness of strangers. You are in control of how much money you make.

* The only way to earn money is to exchange something for it – your time, your expertise, or something you own.

* The best way to have that exchange is on a voluntary basis, with everyone free to buy or sell as they wish. This is called a free market. A free market, therefore, is the best way to create economic growth.

There is one more way to make money: You can borrow it and invest it and have the investment pay off the loan and leave you with a profit.

This is a standard practice of at least half the businesses in the US and the rest of the world. Some make the borrowing (debt-financing) work for them. Some don’t.

The trick to making debt-financing work is to invest the money in something that has a good chance of being profitable. That’s why investing in infrastructure generally makes sense for businesses and for economies. But spending borrowed dollars to pay for spending is generally a terrible idea.

You know this from your personal experience. You have friends and family members that are always maxed out on their credit cards, always hiding from their creditors, always getting into more and more debt because they borrowed money they couldn’t possibly pay back.

This is the core problem with the solvency of America right now, and it’s why it’s so important to understand how our government spends the trillions of dollars it doesn’t have.

The Idiot’s Guide to Monetary and Fiscal Policy in the US 

I’m hardly an expert in economics. And my understanding of fiscal and monetary policy has come very slowly over many years. In fact, before writing these Corona Economy essays, I asked Tom Dyson, a colleague who understands this subject much better than I do, to give me a refresher course. “Explain this to me as if I were one of your children,” I said. “Actually, no. Your kids are super-smart. Explain it to me as if I were a really dumb version of your kids.”

And he did.

Tom began by pointing out that there are two federal systems that operate together: the fiscal policies of the government and the monetary policies of the Federal Reserve, our central bank.

The fiscal system is what I was talking about on Friday. It’s how our government gets and spends its money. On the get side is tax revenue. On the spend side is everything our representatives vote for to get themselves elected: military spending, social spending, spending to support our businesses, foreign aid, etc.

If, in any particular year, the government spends more than it gets from taxes, it creates a deficit. If it spends less than it gets from taxes, it creates a surplus. (This is the fiscal counterpart of profit and loss.) In theory, we should want the fiscal system to balance the budget every year – or, in good years, to create a surplus.

In fact, since WWII, we’ve had a lot more years with a deficit than a surplus. I’ll get to that in a moment.

The Mechanics of Debt 

When the government runs a deficit, it has to cover that deficit somehow. The way that’s normally done is with debt. The Treasury posts a sign saying, “We need dollars. Anyone out there want to lend us some?”

This is done through Treasury bonds, which are basically loan contracts. [See “Did You Know?” below.] The person who buys the bonds is the lender. The government is the borrower. And as with most loan contracts, the borrower (government) promises to pay back the lender (bond purchaser) the amount of the loan plus interest.

If, for example, the government spends a billion dollars more than it makes in taxes, it must sell a billion dollars’ worth of Treasuries to make up the difference.

And if the government continues to runs deficits and sell bonds to cover them, it’s going to get deeper into debt.

The problem with growing debt is the same for the government as it is for businesses and consumers. The government has to pay interest on it. If the debt is great and the interest it has to pay is high, the government can find itself in a position where it’s forking over a large percentage of its income (from tax revenues).

A Potentially Catastrophic Problem… or Is It? 

This is a crude example, but it is essentially the problem that the US government has right now. It has been deficit spending almost every year for the past 70 years, and at the rate of more than a trillion dollars every year for at least 10 years. It has a debt of $24 trillion now and a loss in tax revenues of maybe $4 trillion. Add to that another $4 trillion to $6 trillion that it will be spending on the Corona Crisis, and its overall debt is likely to be $30+ trillion over the next few years.

But is that really a bad thing?

Common sense would tell you it is. But there are economists that will argue it’s nothing to worry about. At an interest rate of 1%, it’s “only” $35 billion. Our tax revenues can easily cover that.

Maybe. But what if our lenders – all those people, businesses, and countries that have been lending us that money (buying Treasury bonds) for so long – decide they don’t like the fact that the US has so little collateral. What happens if our credit dries up?

In fact, that’s already happened. You’ve probably read about it. It happened in what they call the repo market.

We’ll pick up on that next time.

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solvency (noun) 

Solvency (SAHL-vun-see), in finance or business, is having assets in excess of liabilities; the ability of an individual or entity to meet its debt obligations. As I used it today: “[Spending borrowed dollars to pay for spending] is the core problem with the solvency of America right now, and it’s why it’s so important to understand how our government spends the trillions of dollars it doesn’t have.”

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Treasury bonds (T-bonds) are US government debt securities with a maturity of 10 to 30 years. They pay a fixed interest rate to the purchaser on a semiannual basis until maturity. At maturity, the purchaser is paid the principal (the face value of the bond). Because they are considered to have low credit or default risk, they generally offer lower yields relative to other bonds. The interest is tax-exempt at the state and local levels, but is taxed by the federal government.

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Rockwell International decided to get into the heavy-duty automatic transmission business and they wanted an introductory video. What they saw, initially, was this rehearsal for camera, lighting, and stage crew – strictly off the cuff. No script. Nothing written down. And it became a legend within the training industry. Click here to watch it.

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