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Predicting the Climax

Reading Time: 2 minutes

We are watching The Fourth Turning unfold before our eyes.

While you should read all of The Fourth Turning by generational historians William Strauss and Neil Howe, here’s one of their predictions for this point in time. The prediction was published in 1997:

The economy will in time recover from its early and vertiginous reversals. Late in the Crisis, with trust and hope and urgency growing fast, it may even achieve unprecedented levels of efficiency and production. But, by then, the economy will have changed fundamentally. Compared to today, it will be less globally dependent, with smaller cross-border trade and capital flows. Its businesses will be more cartelized and its workers more unionized, perhaps under the shadow of overt government direction. And it will devote a much larger share of its income to saving and investing. Fourth Turning America will begin to lay out the next saeculum’s infrastructure grid—some higher-tech facsimile of turnpikes, railroads, or highways. The economic role of government will shift toward far more spending on survival and future promises (defense, public works) and far less on amenities and past promises (elder care, debt service).

Howe, Neil; Strauss, William (2009-01-16). The Fourth Turning (Kindle Locations 5729-5735). Random House, Inc. Kindle Edition.

I have no idea whether Donald Trump ever read The Fourth Turning. But it doesn’t matter. Strauss and Howe never intended their books to be prescriptions for governance. Instead, The Fourth Turning was meant as a prophecy. It was a scenario of what was to come, not what the authors wished to come. They didn’t advocate for a less globally-dependent economy; they foresaw it.

Disturbingly, few business leaders see this coming. Executives continue these globalization investments despite mounting evidence that Strauss and Howe were mostly right. From the UK to the USA, from France to Italy and Greece, people are fed up with globalization and demanding their governments fix problems at home. Only those out-of-touch, self-absorbed globalist elites fail to see that times have changed.

As the USA approaches the climax of the Crisis, smart executives will focus on making America great again and worry less about creating markets in tiny, failed economies overseas. Smart executives will think about making America great, not just their stockholders.

Apple and Ford have already indicated they get it. Or, at least, they’re pretending to get it. Apple is exploring ways to build iPhones in the USA. Ford has decided to keep some car lines in the USA. Expect other companies to follow suit. Pretty soon, “made in America” will make companies rich.

Meanwhile, American consumers, especially those who voted for Trump, should seek out and demand American-made products. I realize you can’t do this for everything. And I realize you’ll have to pay a little more. But, wouldn’t it say a lot if Trump voters consumed fewer things so they could buy mostly American things? I’ll bet that you could find ten things in the room your in that you really didn’t need. If you’d skipped those unnecessary, wasteful purchases, you might have been able to afford the American-made versions of the stuff you really needed. It’s easy to make the switch once you get started. You might even find yourself looking at the country of manufacture the next time you’re in a store.

America gave itself a new lease on life this year. Let’s spend it well. If we do, in just four years we’ll be able to say “America is back.”

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It Can Happen Again—The Big Short Movie

Reading Time: 8 minutes

“You know how when you walk into a post office you realize there is such a difference between a government employee and other people,” said Vinny. “The ratings agency people were all like government employees.”

The Big Short: Inside the Doomsday Machine (movie tie-in) (Movie Tie-in Editions) (p. 156). W. W. Norton & Company. Kindle Edition.

I wanted to blame the government.

Like millions of American conservatives, I had developed a powerful narrative of the way the world works.

  • Big banks got big because they did things right.
  • Investments banks made money because they hired top MBAs and lawyers and accountants (sometimes all three in one person) who worked their asses off, took intelligent risks, and kept going even after they’d earned “enough.”
  • Big corporation got big by producing great products that people loved because the products made real lives better.
  • The American economy grew because of ingenuity and hard work.
  • And when the system didn’t work right, when big inequalities emerged, it was because of government interference. Postal workers shouldn’t interfere with Masters of the Universe, to borrow Tom Wolfe’s line.

I’ve believed and recited that narrative (in excruciating detail with reams of supporting documentation) since I was a high school freshman.

The Big Short opened in theatres today. The movie explains the poison that’s enveloped the kernel of truth. Despite many laughs, you’ll leave the theatre mad as hell.

That narrative, which I’ll call The American Design, is so powerful because it’s true.

More accurately, the narrative contains truth. There’s a kernel of truth in The American Design. And that kernel is firm enough and large enough and well-known enough that whenever a socialist challenges the narrative, we on the right slap down their heresies by hurling the kernel back at the heretic like a pea spat through a straw.

But the kernel of truth is like a healthy seed surrounded by rotting fruit. The flesh of the fruit is poisonous. And we eat from it every damn day.

The Bursting Bubble

In 2007, I was taking macro economics. My instructor was an executive at a small regional bank. (Maybe a community bank.) He went off script a few times to warn us that there was a housing bubble that would soon burst and take the whole financial system with it.

That banker worked for a bank that didn’t sell its mortgages and didn’t offer fraudulent no-doc subprime loans with teaser rates to people without jobs. They offered some subprime, but only if they were willing hold the loan themselves. They wouldn’t sell a shit loan to Goldman Sachs or Bank of America or Merrill Lynch just because the big banks begged for the shittiest paper it could buy.

None of us in class really understood what he was talking about. Like 99.999% of Americans, we trusted that the big banks got big because of smart, hardworking people. We figured this night college instructor was a Midwestern buffoon who envied his New York brethren and $50 million bonuses. Human nature.

Within a year, we all knew that the night college instructor who worked at a bank with a balance sheet smaller than Goldman Sachs’s annual catering bill knew more about banks, money, and the economy than Lloyd Blankfein, Ben Bernanke, Vikram Pandit, and the faculty of Harvard Business School combined.

If our instructor explained how shitty loans became mortgage bonds which became collateralized debt obligations which balanced out credit default swaps which inspired synthetic CDOs, I didn’t understand his story well enough to remember it. It wouldn’t be on the test.

Interest-Only Express Cruisers in Party Cove

About this time, I met up with Chris, my insurance agent, for happy hour at The Country Club in Town & Country. Chris told me that something bad was about to happen.

His agency was busy as hell in early 2007, busy writing new homeowners and boat policies for long-time customers. Longtime customers with good income and enough birthdays under their belts to know better.

“They’re refinancing for a hundred and ten, hundred and twenty percent of value on interest-only loans with options to skip four payments a year,” he told me. “They’re using the refi checks and their low mortgage payments to buy express cruisers for their second homes at the lake.”

“If you’re paying only interest and skipping four payments a year, when is the loan paid off?” I asked.

“Never.”

These subprime borrowers were otherwise responsible, successful, educated St. Louisans, most with kids in high school or college or beyond. They had high FICO scores but not high enough to get $450,000 for a $400,000 house with a payment of $520 a month. So they went to Countrywide and Wachovia and other criminal mortgage houses, signed no-doc variable APR notes, and pumped all their newfound (borrowed) cash into $500,000 boats to cruise Party Cove.

Not all subprime borrowers were strippers.

The Wealth Effect: Your Government at Work

From the 1990s to 2007, millions of Americans fell victim to a cruel and unusual scam operated by the United States government and Wall Street. The name of the scam: The Wealth Effect.

The wealth effect is the theory that people borrow and spend more when they believe the economy will get better in the near future. So a rising stock market, a rosy jobs report, and inflating home values will all drive people to borrow and spend—just like government.

Those otherwise upstanding St. Louisans who took out subprime loans believed Jim Cramer and Ben Bernanke and Tim Geithner and Milton Friedman and Allen Greenspan and everyone else who said real estate can only go up in value “because God ain’t making anymore land,” chuckle, chuckle.

So from 1990s to 2007 (and again since 2010) CNBC and Fox Business News paraded out analysts, economists, professors, advisors, Treasury Secretaries, former Reagan advisors, and anyone else willing to look into the camera and tell the American public “The Dow will double in the next four years, and housing prices will continue their trend of ten to twenty percent annual increases.”

Some of these pundits and experts actually believed what they were saying. People are wired to believe that the future will be a linear progression of the recent past. If it’s not a documented psychological fallacy, it should be. (Howe and Strauss explained this fallacy in The Fourth Turning. But did we listen?)

Others who spoke about the unstoppable American economy were paid to lie. Or they lied because they could make more money on the lie than they could by telling the truth.

But the people in charge of the banks and the government either knew or should have known that the wealth effect was a mirage and perpetuating people’s belief in the mirage was a crime. They perpetuated the lies, anyway.

“The impact on the broader economy and the financial markets of the problems in the subprime markets seems likely to be contained,” U.S. Federal Reserve chairman Ben Bernanke was quoted as saying in the newspapers on March 7.

We all know what happened next.

  • About $5 trillion of the wealth effect was wiped out from 401(k)s, retirement funds, stock portfolios, and home values
  • Eight million people lost their jobs
  • Six millions homes were foreclosed on
  • The labor force participation rate returned to 1976 levels and continues to fall every month
  • GDP growth has never been weaker following a recession
  • A malaise wraps the country

Save the Rich and Powerful–From Themselves

You and I and most of the people we will see or meet or talk to between now and the day we die took a step back in standard of living because of the subprime debacle.

The people who caused the debacle only profited. As Michael Lewis writes in The Big Short:

The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

I don’t spit that kernel of truth about the American Design at heretics any longer. Not because I’ve defected to their side—I have not. But while watching the movie version of The Big Short tonight I realized that the rotting flesh surrounding the kernel of truth is so rancid, so poisonous, and so large that I risk my own life putting the kernel in my mouth. I’m pretty sure it’s impossible to defend the financial system without succumbing to its lethality. Or maybe increasing that lethality.

Back to the book:

The people in a position to resolve the financial crisis were, of course, the very same people who had failed to foresee it: Treasury Secretary Henry Paulson, future Treasury Secretary Timothy Geithner, Fed Chairman Ben Bernanke, Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, and so on. A few Wall Street CEOs had been fired for their roles in the subprime mortgage catastrophe, but most remained in their jobs, and they, of all people, became important characters operating behind the closed doors, trying to figure out what to do next. With them were a handful of government officials— the same government officials who should have known a lot more about what Wall Street firms were doing, back when they were doing it. All shared a distinction: They had proven far less capable of grasping basic truths in the heart of the U.S. financial system than a one-eyed money manager with Asperger’s syndrome.

Or, for that matter, an officer at a tiny Midwest community bank who teaches night college to make ends meet.

Sliding Down the Hanlon’s Razor of Life

Hanlon’s Razor instructs us:

Never attribute to malice that which is adequately explained by stupidity.

When Ben Bernanke gave America the “all’s clear” from the subprime meltdown before the meltdown had really started, he probably wasn’t lying. He simply didn’t understand how the system worked. (Frankly, he still doesn’t have a clue how the system works. It’s both too simple and too complex.) As Lewis wrote in The Big Short:

The big Wall Street firms, seemingly so shrewd and self-interested, had somehow become the dumb money. The people who ran them did not understand their own businesses, and their regulators obviously knew even less.

Most of the Wall Streeters depicted in The Big Short didn’t become criminals until after they realized they’d been stupid all along. That was in June 2007 when for five days all the banks refused to answer phone calls from the heroes of the movie—because of a power outage or server failure or phone failure or whatever feeble lies they told them. Lewis described this period in The Big Short, which is also depicted, frustratingly, in the movie:

On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday— to tell him that she was “out for the day.” “This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.” On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime mortgage bonds collapsed, the market for insuring them hadn’t budged. But she did it from her cell phone, rather than the office line, on which the conversations would have been recorded.

I believe that in those five days the banksters committed the greatest robbery and cover-up in history, and the Bush administration and the Fed became willing accomplices. No one could admit he’d been wrong for 20 years — wrong in every way about money, banking, economics, credit, and risk. No one in Washington or New York could stomach admitting that my macro economics instructor at Fontbonne who worked at a community bank in the Midwest understood money, banking, economics, credit, and risk better than the Masters of the Universe. And all those bankers and economists and Bush appointees were willing to risk prison or riots or lynching to avoid admitting the truth.

Of course, the banksters and their government accomplices were not prosecuted or hanged by mobs: they paid themselves billions in bonuses with taxpayers’ money.

Remember the TARP bailout that Senator Roy Blunt and Representative (now Speaker of the House) Paul Ryan championed?

Once handed the money, Paulson abandoned his promised strategy and instead essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs, and a few others unnaturally selected for survival.

And nothing has changed. Not a damn thing.

But it will. And this time, the Fed and the government are out of weapons. There will be no cover-up, no QE, no TARP, because this time the government itself will be insolvent.

Before the new year, see The Big Short. If it makes you mad as hell, you get it. If it doesn’t, spit out the kernel before you die.

Read Jim Quinn’s review of The Big Short here.

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Correction

Reading Time: 2 minutes

Something weird happened in the stock market today.

Yesterday I blogged about the stock markets. I’d been up early to see what was going on in Europe and Asia. I was watching US futures, too.

I decided to write about what might happen. And I told you about Ben Hunt, my favorite economics writer. Ben combines remarkable knowledge of game theory and psychology with his genius in finance and economics.

I also declared the end of the Golden Era of Central Banker:

There’s good news in all this loss. First, stocks were overpriced. At some point, they will bottom out and it will be time to start buying. Second, the Golden Age of the Central Banker seems to be over. And that is very good news.

And I attributed the phrase “Golden Age of the Central Banker to Ben.

Well, today I was tickled to find a new note from Ben in my inbox. But Ben says my call on the Central Bankers is too early:

I see very little weakness in either the US growth story (best house in a bad neighborhood, mediocre growth but zero chance of recession) or the Narrative of Central Bank Omnipotence. Do I think that the Fed is being stymied in its desire to raise short rates in order to reload its monetary policy gun with conventional ammo? Yes, absolutely. Do I see a significant diminution in the overwhelming investor belief that the Fed and the ECB control market outcomes? No, I don’t. Trust me, I’m keeping my eyes peeled (see “When Does the Story Break?”), because in many respects this is the only question that matters. If this story breaks, then in the immortal words of Chief Brody when he first saw the shark, “You’re gonna need a bigger boat.”

(BTW, do yourself a favor and read When Does the Story Break? One of the best lessons in narrative and common knowledge ever.)

If Ben says the narrative of central bank omnipotence is unbroken, I believe him. And I read his warning of how ugly things will get when that story breaks, I shudder.

But based on the time Ben’s email hit my inbox, I’d say he wrote it–or edited it–this morning while the DJIA was up over 300 points. By the time I read it, the DJIA had closed down 205. It was biggest intraday rollercoaster since Lehman.

And then I read this on Business Insider:

By my reckoning, most investors already have little faith in the political leadership of many developed economies. But there has been a deep faith in the ability of monetary policy to both lift asset prices and, ultimately, generate an adequate inflation rate over the medium term. If investors start to doubt that – and the decline in break-even inflation rates suggests concern (Exhibit 8) – then things could get significantly worse.

And, from the same BI article:

The bull market is not over even if the unusual characteristic that was the powerful driver for price-to-earnings expansion is probably over, namely the power of zero rates and central bank/government ability to distort or manipulate the markets.

Look, Ben Hunt’s forgotten more about game theory and narratives and markets than I’ll ever know, so I’ll accept that the fat lady hasn’t sung the end of the Golden Era of the Central Banker.

But I hear somebody humming.

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China Is Crashing and Greece Is Spinning Out of Control

Reading Time: 2 minutes

The world is even more fragile than it was in 2007. The big banks are bigger. Aggregate bank assets are concentrated in fewer hands. The bank derivatives books are much larger. Market liquidity is worse.

James Rickards, The Daily Reckoning

Well, ain’t that just dandy?

And it’s undeniably true. We were told that the 2008 financial meltdown was caused by entities that had grown too large: banks, insurance companies, corporations, derivitives. They’d grown too big to survive and too big to fail.

Their investors and lenders were wealthy and connected. They used their connections to nudge politicians to transfer their losses from private companies and individuals to government balance sheets. Governments, after all, can collect debts at the point of a gun while private companies are limited to annoying debt collection calls.

To cover their tracks, politicians passed ridiculous laws written by the very failed business people who caused the problem in the first place: big banks, Wall Streeters.

And the result has been predictable. As James Rickards reminds us:

  • The big banks are bigger
  • Bank assets are concentrated in fewer, more powerful hands
  • Derivitives are bigger and more opaque
  • Liquidity is worse
  • And the central banksters are out of ammunition

Obama’s State Department is busy giving away the farm to Iran in pursuit of a “legacy.” But Obama’s legacy will be this: he left the world less stable, less democratic, less equal, and less optimistic than he found it.

We have a hell of a mess to clean up. It will likely consume the rest of our lives. At least, the rest of the lives of Boomers and Gen Xers. Millinnials may enjoy a brighter future after the storm.

Left vs. right, liberal vs. conservative, Democrat vs. Republican are all false dichotomies.The real fight today is Elites vs. Us.

China is crashing.

Greece is out of control.

Buckle up. We live in a world more fragile than it’s ever been. And fragile things break.

There are so many fragile things, after all. People break so easily, and so do dreams and hearts.

― Neil Gaiman, Fragile Things: Short Fictions and Wonders

Feature image by djoe clipped from http://djoe.deviantart.com/art/Human-fragility-21891471

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A Dangerous Misunderstanding of Debt

Reading Time: 2 minutes

Debt is not a guarantee of future payments in full. Rather, it is a risk that creditors take, in hopes of maybe being paid tomorrow.

The key word there is “risk.”

If you’re willing to take the risk, you’ll get a premium — in the form of interest.

But the downside of that risk is that you lose your money. And Greece just called Germany’s bluff.

Jim Edwards nailed a major problem with modern finance. At some point, the financial world thinks that all debt must be guaranteed. That lenders must recover all of their principal and all their expected interest no matter what.

But lending is always a risk. If there is no risk, there is no interest. Normal people understand this. When we lend a circular saw to a neighbor, we might never see it again. Or the neighbor might break it. We take the risk in hopes of earning interest in the form of trust and loyalty from the neighbor.

When we lend money, we hope to get the money back, plus interest. But we understand we might never see the money again.

Every modern economy has some provision for bankruptcy because we expect some loans will go bad despite the best of intentions from all parties.

In 2008, the financial world decided it would no longer deal with bad debt. Instead, it would force debtors to take on even more debt, along with rules for living imposed by the lender. No businesses or big banks were allowed to fail even though many big businesses and banks had made years of bad decisions.

The Greek people have finally yelled “no more!” Now, it’s time for the rest of us to do the same. No more bailouts for Wall Street. No more bailouts for insolvent international corporations. No more forcing debt onto insolvent countries.

Let the risk-reward markets settle their own scores according the rules that were in place at the time the original loan was executed. Status quo ante.

Finally, here’s Jim Edwards’ close. He puts it much better than I tried to yesterday:

Greece is now likely an international pariah on the debt markets. It may have to start printing its own devalued drachma currency. It will have no access to credit. Sure, olive oil, feta and raki will suddenly become incredibly cheap commodities on the export markets. Tourism in Greece is about to become awesome. But mostly it will be awful. Unemployment will increase as Greece’s economy implodes.

But the awfulness will be Greece’s alone. Greece is now on its own path. It is deciding its own fate.

There is something admirable about that.

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Greece Rejects Central Banksters

Reading Time: 2 minutes

Greece has voted to reject the “troika’s” bailout terms. The people of Greece said “no” to the central banksters who encourage sovereigns to enslave themselves under mountains of debt.

The Greeks showed remarkable courage and resiliency, and their example could disrupt the entire international banking system. Tyler Durden at Zero Hedge:

The Greek people have spoken and they said “OXI”!
So congratulations Greece: for the first time you had the chance to tell the Troika, the unelected eurocrats, and the entire status quo establishment, not to mention all the banks, how you really felt and based on the most recent results, some 61% of you told it to go fuck itself.

 

At a minimum, the Greferendum has destroyed the dream of the Euro. Via Fox Business:

If confirmed, the result would also deliver a hammer blow to the European Union’s grand single currency project. Intended to be permanent and unbreakable when it was created 15 years ago, the euro zone could now be on the point of losing its first member with the risk of further unraveling to come.

Indeed. But the implications of the Greek referendum will reverberate much farther than the Mediterrean or the Eurozone.

  • China’s sham stock markets, already having fallen 30 pecent in three weeks, could crash another 50 percent this week.
  • Spain, Italy, and Ireland will likely demand restructuring of their debt.
  • In the US, sensible people who’ve been warning of the dangers of trying to borrow our way to prosperity have new leverage and a bold example in demanding an end to government-by-credit-card.
  • The Golden Age of the Central Bankster will come to crashing close

And, as former Reagan economist David Stockman put it:

None of the governments which foisted these obligations on Greece will survive a blanket default. The more likely scenario is that the successor governments—–almost certain to be anti-EU—- will disavow the guarantees undertaken by the EFSF and demand haircuts from the underlying bank and bond holder claimants. Stated differently, a Greek default on its $150 billion of EFSF funding would trigger a domino effect back to the status quo ante.

The coming weeks will change the world. Greece will suffer in the short run but it will lead the world into the post-Bankster future. Call it “redemptive suffering.” The last nation to dive into the abyss will suffer the most and lose the most. The best economics writer alive, Ben Hunt, put it this way:

If Greece votes to reject the proposal, then either the game resolves itself within the stable Nash equilibrium of a shamed Euro status quo and a triumphant Greece (if the ECB and EU decide to cave to some form of the original Greek proposal), or we enter the death spiral phase of a game of Chicken, as all parties start to talk about how they “have no choice” but to crash their cars. That latter course is the far more likely path, I think, given how the various Euro Powers That Be are already positioning themselves. It’s all so very 1914-ish. Draghi’s cap on bank-supporting Emergency Liquidity Assistance (ELA) is the modern day equivalent of Czar Nicholas II’s troop mobilization. Good luck walking that back.

Congratulations and thanks to the Greek people. The rest of us better buckle our seatbelts.

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Take a Walk on the Hedonic Treadmill

Reading Time: 2 minutes

Here’s what happens when you raise the minimum wage to $15 an hour, according to scientists:

Nothing.

Well, not nothing. All kinds of bad things happen to the economy. But nothing happens for two groups of people central to the whole debate: workers who get a bump to $15 and employers who have to bump to $15 an hour.

Most cities and states that have raised their minimum wage laws to $15 will phase in the increase over five years. That pretty much means the market will have adjusted to the change long before it becomes effective. But that’s a terrible scenario to test my theory, based on research by Harvard psychologist Dan Gilbert.

Let’s do this instead: let’s raise the minimum wage to $15 in 30 days.

But first, let’s give a standard happiness survey to a thousand minimum-wage earners before we announce the increase. And let’s give the same test to wager payers.

Then, let’s re-administer the test to both groups 30 days after the minimum wage hike goes into effect. And let’s test them all again one year later.

To keep the experiment clean, the final analysis will include only those who a) kept their minimum wage job for the whole year, or b) kept their minimum-wage paying business open the whole year.

I can tell you the results. One year after the minimum wage goes to $15 an hour, workers making minimum wage will be just about as happy as they were before they learned the minimum wage was going up. Same for the businesspeople who pay them.

In between, just after the wage jumps to $15, worker will be euphoric and owners will be miserable.

minimum-wage-happiness

It’s called the hedonic treadmill. Even if we ignore the economic effect of a big jump in minimum wage (like business failures and higher unemployment for those who most need entry-level jobs), we know from science that people adjust quickly to changes in their circumstances.

When you get a new car, it’s awesome, but a year later, it’s nothing special.

When you buy a new pair of shoes, you love them. And even if they’re still in great shape a year later, they’re just a pair of shoes.

Dan Gilbert found that one year after winning the lottery and one year after becoming paralyzed, both groups of people were just about as happy as they were immediately before those life-changing events.

Dan Gilbert, (1) a Harvard psychologist has researched lottery winners and found that ‘the happiness effect’ starts to decline after just a few months. Once the initial elation of getting the big cheque has worn off , people seemed to return to their previous level of happiness or unhappiness.

Raising the minimum wage to $15 is a political ploy with economic downsides and no long-term benefit for the people who get the minimum wage.

On the other hand, helping a $7.25 an hour worker earn a 100 percent raise does wonders for that person’s life, outlook, and self-esteem while providing economic benefits to his employer, his family, and his community.

So go ahead and double the minimum wage, Francis. It will do nothing but accelerate St. Louis’s slide toward irrelevancy.

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Low Interest Rates Hid True Cost of Increasing Debt

Reading Time: 3 minutes

House mortgage-type instrument suggested as means to pay off national debt

Guest Post By Lee A. Presser

Interest rates have been held artificially low by the Federal Reserve since 2008.  This has had the effect of hiding the true cost of increasing debt.  As interest rates rise back toward 4%, the U.S. Treasury will have less money to spend on discretionary governmental functions.

The FY 2015 budget is approximately $3,900,000,000,000.00.  Another way to look at that number is about $12,187.50 per person for all 320,000,000 people in the U.S.

The $3.9 Trillion budget has been divided by the Treasury into three main categories; mandatory spending, discretionary spending, and interest costs.  In FY 2015 mandatory spending will equal 65% of the budget.  Mandatory spending is America’s entitlement programs.  Discretionary spending is everything else including the military, except interest costs.

The interest amount paid on the United States national debt may be about to sky-rocket as interest rates in the U.S. return to 4%.  Instead of paying $430,812,121,372.05 interest at an average 2.401% rate as the Treasury did in Fiscal Year (FY) 2014, the amount may soon grow to $769,861,040,000.00 if rates return to 4.188%, the average rate at the end of FY 2008.  (Treasury Department websites http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm and http://www.treasurydirect.gov/govt/rates/pd/avg/2008/2008_09.htm)

The $769.8 Billion calculation is based on the debt amount as of September 30, 2014.  The actual amount of interest paid when rates return to 4% will be based on a larger amount than the $18 Trillion owed September 30, 2014.  When the amount owed reaches $20 Trillion, the annual interest amount paid could be as high as $855,401,140,000.00 (based on a 4.188% rate rather than a 2.401% rate).

 A debt generally refers to money owed by one party, the debtor, to a second party, the creditor. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.

(Wikipedia http://en.wikipedia.org/wiki/Debt)

National debt is the money owed by the central government (in this case the United States Treasury) to its creditors; those who loaned it money at interest.  The national debt is different than the annual deficit.  The deficit measures the amount the debt has increased from one year to the next year.

The interest rate paid by the U.S. Treasury on its debts varies depending on the contract it signed with each creditor.  The “interest bearing debt” generally falls into two categories; “marketable” and “non-marketable” securities.  The average interest rate of all the subcategories making up the “marketable” and “non-marketable” securities is called the interest rate on the “Total Interest Bearing Debt.”

At the close of FY 2007, the “Total Interest Bearing Debt” rate was 5.009%.  By the close of FY 2008 the rate declined to 4.188%.  At the close of FY 2014, the “Total Interest Bearing Debt” rate was 2.401%.  (Treasury Dept. website http://www.treasurydirect.gov/govt/rates/pd/avg/2014/2014_09.htm)

 

When interest rates rise and the debt continues to increase (because of deficit spending), the United States Treasury has less dollars to spend on discretionary governmental functions.  Since interest must be paid to avoid default, discretionary spending must be cut.  The other option is to increase the deficit and add to the debt.  A larger debt results in increased interest costs in the coming Fiscal Year.

 

A change in trajectory is needed to avoid financial disaster.  Perhaps the solution is to assign the federal debt to a 30-40 year mortgage and pay it off like a house payment.  As the debt amount declines, more money will be applied to principal.  Of course, no addition debt can be added.  Increased expenses must be paid from current income and/or from increased taxation.

 

If Congress cannot agree to control itself, financial disaster is predictable and has been explained above.