Sunday, January 6, 2013

THE PUBLIC DEBT HYPE

By the end of the current month of January 2013, public debt of the United States of America will amount to somewhere around $ 16.5 trillion, or approximately 110% of Gross Domestic Product.  There is no lack of hysterics around the subject, not to mention political gamesmanship, so I thought some facts could be in place to illuminate the subject.

Since one man's debt is another man's asset, let us take a look at who holds this public debt, and the likely consequences thereof.

FEDERAL RESERVE & INTRA-GOVERNMENTAL HOLDINGS
For starters, close to half the public debt, or nearly $ 8.0 trillion, is held by the government itself - at the Federal Reserve in consequence of current monetary policies, and as intra-governmental holdings mainly as the result of borrowings from a surplus in the Social Security Fund.  Since government cannot by definition owe money to itself, this very substantial portion of the public debt is nothing but accounting smoke and mirrors.

FOREIGN & INTERNATIONAL HOLDINGS
These are equivalent to approximately one third of total nominal debt, or something short of $ 5.5 trillion, amost all of which is denominated in U.S. currency.  This debt is fundamentally resulting from the fact that, since the 1980s, the United States has consistently been running a negative balance of trade with the rest of the world, currently amounting to some $ 550 billion per year.  It means that we consume more than we produce, and that the rest of the world continues to accept U.S. Treasury IOUs in payment.  It should be mentioned that this trade deficit is partly offset by some $ 100 billion of annual net positive inflows stemming from U.S. assets held abroad.

Incidentally, for those wailing about the United States of America being entirely in hoc to China, that country owns about 20% of the public debt held abroad, or somewhat in excess of $ 1.0 trillion.

Well, you may say, $ 5.5 trillion in public debt to the rest of the world is not peanuts.  What would happen if the holders of this debt decided to divest themselves of U.S. dollar assets?  Actually, nothing much, because the dollars would not evaporate into thin air, they would simply be held by someone else.  If enough dollars started changing hands, the likely effect would be that the price of those dollars - the exchange rate relative to alternative currencies - would fall, something which has indeed been going on at a steady clip for the last ten years.

This is actually good for the United States.  A cheaper dollar helps making American goods and services more competitive on the world market - and conversely - makes imported goods and services relatively less competitive against alternatives produced in the U.S.  This will help increasing U.S. employment and reduce the trade deficit, the root cause of foreign indebtedness in the first place.  Until then, the public debt held abroad will just keep growing and could eventually become a real problem.

However, a wholesale liquidation of dollar assets is not so easy, for lack of viable alternatives.  85% of all world foreign exchange transactions take place in U.S. dollars, a market involving an eye-watering $ 4 trillion plus per day! 60% of all the world's official foreign exchange reserves and 50% of all foreign debt securities are denominated in U.S. dollars.  In other words, while a depreciating dollar may do the United States some good, there is a lot of counterparties out there on the losing end of this deal and therefore not that keen to see it happen.

Theoretically, the foreign holders of U.S. Treasuries could swap them for other U.S. assets - corporations, real estate or stocks - which would drive prices up of said assets if practiced on a large enough scale.  Nice for the current U.S. owners of same, but political implications aside, let us not bet on this ever happening in a big way.

PUBLIC DEBT HOLDINGS AS INSTRUMENTS OF SAVINGS
The remaining 20% or so of the $ 16.5 trillion nominal debt, or $ 3.3 trillion, are held in the United States by state and local governments, insurance companies, pension and mutual funds and their likes, generally for the purpose of funding future pension and casualty obligations.  These holders of the public debt will not evaporate.  To the contrary, they will steadily increase their holdings pretty much in lock-step with GDP growth.

But what is currently a huge advantage for the federal government of being able to borrow money at what effectively are negative interest rates, is an equally huge time bomb for those holders of Treasuries that depend on the interest income to fund future liabilities with a present value - discounted at these low rates - way in excess of current funding values on hand.

SUMMA SUMMARUM (ON THE WHOLE)
Let us therefore stop waxing hysterical about the size of the public debt.  It is at best nothing more than a political ploy to divert attention from the real underlying problems.

Which are: what to do about the trade deficit and, much more importantly, what to do about the time bomb of unfunded future entitlement benefits.



Friday, January 4, 2013

AMERICA AND ITS GUNS

On December 14, 2012 we witnessed the wanton murder of 20 children between the ages of 6 and 7, as well as 6 adults, at an elementary school in Newtown, Connecticut.  The perpetrator was an emotionally disturbed 20 year old man with automatic assault weapons, lifted from his divorced mother's ample gun collection. after having first murdered her in the home where they lived together.

There have been 61 mass shooting incidents in the United States since 1982, 30 since the Columbine incident in 1999, and 10 in the year 2012, alone.  The record alone is shocking - the time-line trend even more so.

With about 30,000 gun-related deaths per year, of which about 17,000 are suicides, about 12,000 are homicides and the remaining 1,000 mostly killimg of innocent bystanders, this places the United States at 4.5 times the per capita average of all OECD nations.

How can a country justify combining its status as the most overtly Christian nation on earth with this record of violent behavior?  Is it a problem of too many firearms at large, is violence an integral part of the American cultural DNA, or is it all of the above?

GUN OWNERSHIP
The Second Amendment to the United States' Constitution, enacted in 1791, states:

"A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed"

These few words have ever since been the subject of much political and judicial discord, often bordering on hysterical irrationality, particularly on whether the amendment should be interpreted as a right in the context of forming state militias, or as a wholly independent and personal right.  The U.S. Supreme Court in 2008 ruled, in a narrow majority decision, that the amendment should indeed be interpreted as an individual right to bear arms.

Well before the enactment of the Second Amendment, common law, as well some early state constitutions, already affirmed people's right to keep and bear arms.  There should be of little doubt that James Madison drafted this particular amendment with the purpose of securing the votes of moderate Anti-Federalists towards fullfillment of his wish to establish a centrally governed United States of America.  Political expediency was not born yesterday.

But the Supreme Court in its 2008 ruling also afirms:

"Like most rights, the Second Amendment right is not unlimited.  It is not a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose." (Italics mine).

Herein lies the seed of the reasonable, as well as maybe the possible, within the context of U.S. politics: a ban on private ownership of semi-automatic assault weapons which can fire multiple rounds of high caliber ammunition without the need for reloading.  The only plausible end use for this category of arms is to kill people, as many as possible and in the shortest time possible.

My concern, however, is that this will not be the logical outcome from the fact that, for once, the nation has been shaken to the core by the Newtown massacre of small children.  We may well end up with nothing more than a call for stricter background-check rules to keep firearms out of the hands of mentally disturbed people, the most likely perpetrators of mass shootings.

The uselessness of such a measure should be evident to anybody.  There is no national database over mentally disturbed people.  In most cases we do not even know who they are before it is too late.

Therefore, the only viable remedy is to make it more difficult for anybody to lay their hands on assault weapons, preferrably also making it a criminal offense to sell and own one.

A CULTURE OF VIOLENCE
This is where the country faces its biggest challenge - this unfathomable fascination with violence in so many aspects of daily life - in movies, television, video games, sports - and in the glorification of gun ownership.

It is interesting to note that in countries such as Finland, Sweden, Norway, France, Canada, Austria and Germany - all with long hunting traditions - in every one of them we find a gun ownership ratio of almost exactly 30 per 100 inhabitants.

It would be reasonable to believe that the gun-ownership-for-hunting ratio is similar in the United  States. That leaves us with another 60 guns per 100 inhabitants, or close to 190 million firearms, laying around at the average of nearly two for every American household.

Since the actual number of households owning guns is situated somwhere between one third and one half the total, depending on who you believe, you may readily conclude that quite a few households contain lots of guns.  For what purpose other than hunting?  Self-defense?

There are no reliable statistics or credible studies attesting to the beneficial value of keeping or bearing guns for self defense.  The conclusions reached by such studies are all over the map, depending on the authors' bias.

It is in most cases a criminal offense to kill an unarmed person under any circumstance, and your chances of successfully confronting and out-gunning an already armed perpetrator ready to pull the trigger is as close to nil as any odds can be.

On the other hand, we should be reminded of the 17,000 annual gun-related suicides.  Shooting oneself is the least complicated way of committing suicide, and ready access to a gun in the home in the moment of ultimate despear certainly have an influence on the number of successful suicides actually carried out.

Furthermore, a substantial proportion of the annual 12,000 gun-related homicides occur in the home, perpetrated by familily members or persons known to the victim, frequently as a result of momentary personal altercations and by use of the victim's own weapon.

Anybody believing that the key to making America a safer and less violent place is more, rather than less, guns out there should have his head examined. Gun ownership for purposes other than hunting, as well as the level of gun violence, already exceed by a wide margin those of any other well established democracy.  That alone should be proof enough that more guns does not make for a safer society.

The United States of America has many great attributes to be proud of and that the world would do well to emulate.  Its attitudes to gun ownership and violence are not among them.