Thursday, June 3, 2010

Driving off of a cliff, and fast...

I apologize that I have not had a blog post in a while. My family has been travelling the past few weekends (Philadelphia, Pittsburgh, Evansville, IN with Boston next week for me).

A lot of things have happened during the past few weeks which have challenged Libertarians and often put us on the defensive including the comments by Rand Paul and the BP Oil Spill. I won't comment on either of these issues, as they are not relevant to a race for Ohio Treasurer of State. However, I'd be happy to share my thoughts if you contact me personally.

Today, a good friend asked me "How bad are the pension funds in Ohio? Is it as bad as California?" I answered "It all depends on who you believe". He persisted, and stated that he wanted my answer. "It's bad," I said.

The one thing I've learned from my formal education is that anything can be justified as if it were fact. You will be able to find "evidence" that the pension funds are in decent shape. You will also be able to find "evidence" that they are bankrupt. Finding the truth takes a lot time and curiosity, something that few people have anymore. While I don't have a lot of time, my curiosity makes up for that. I read and listen to every possible angle before making an informed decision. And I only make an informed decision after I have looked at the data. Numbers do not lie.

After reading annual reports, crunching numbers and sifting through the propaganda (on both sides), I have come to the conclusion that public pension funds will eventually prompt another federal bailout (not an action I endorse by the way). Several states (California, Illinois) simply cannot survive. Other states (Ohio) are not far behind. I am convinced that the federal government is either waiting until a majority of states are in the same position, or will do something behind the scenes that goes unnoticed to many.

Why are our public pension funds in such poor shape? It is the easiest thing for a politician to promise and for a union to demand. Raising salaries can be unpopular with voters, but how many voters know the details of the pensions of public employees? Furthermore, it is very easy to kick the costs down the road to another generation of taxpayers or employees.

Some propaganda is already starting to come out regarding what a successful year public pension funds had from an investment return standpoint. While this is great news, the fundamental problem is not going away. (First of all, mathematically speaking, if you lost 25% of your assets one year, and made a 25% return on investment the following year, you are still negative for the period. This is what I am expecting to see out of many of the state reports. This is a period of two years where states were counting on 8% in each year.) We have promised too much, to too many. A system of working for 35 years and retiring for 35 years is not sustainable.

What can I do about it if elected to Treasurer of State. First, I can bring this issue to the attention of the public. As CFO of the state, it would be my duty to point out the true nature of our fiscal crisis to the taxpayer. You would see me highlighting this issue every day in the press, because that is my job. Second, I can work with the legislature to propose solutions. What solutions would be acceptable from a Libertarian standpoint? Anything that does not involve more of your tax dollars would be my answer. We can increase the retirement age, reduce the maximum payments, reduce the cost of living adjustments, increase employee contributions or a combination of the above. Ideally, we should move new employees to a defined contribution plan and phase out the defined benefit model over the next few decades.

Every fiscal problem our state and nation face is solvable. It is the politics that makes these issues impossible to solve. Therefore, we must change the types of people we elect to office and our view of government (even if it makes us a bit uncomfortable at first having citizens who are "less seasoned" on your TV programs). Anything less will lead this state off of a cliff within the next few years. The only difference between the traditional Democratic and Republican candidates is how fast we get to the edge of the cliff. Personally, I'd rather turn the car around.

Monday, May 17, 2010

No Mr. Krugman, Libertarianism Does Work

As mentioned in one of my previous posts, I force myself to read all of Paul Krugman's columns. This week's was more difficult than most:

If you've followed Paul Krugman as closely as I have, you realize that he takes every opportunity to attack Milton Friedman that he can. This is unfortunate, as I consider Milton Friedman to be one of the greatest economists in world history. However, his arguments attacking libertarianism were even more illogical.

First, he implied that we somehow support caps on liability for polluters. This is odd, as there isn't a single Libertarian I know who thinks that taxpayers should pay for this disaster (which is exactly what would happen under the liability cap).

Second, an environmental disaster and the loss of potential revenues is never in the economic interests of any firm. Some businesses may make decisions which in hindsight appear to be "greedy", but I assure you of the following: A business truly aware of earning profits desperately want to avoid situations like these. However tragic (and it is extremely tragic) this incident is, more safeguards will come from businesses fearing future economic consequences than any regulation an industry influenced congressman can write.

Third, the final argument he makes is by far the most odd. He states "...and don't say that we just need better politicians. If libertarianism requires incorruptible politicians to work, it's not serious."

Actually Paul, one of the many reasons Libertarians want a smaller limited government is exactly because we realize politicians are corruptible. Can Mr. Krugman honestly not understand this?

As usual, I turn to The Cato Institute to explain:

You will find that after every government failure, the government seeks more power to prevent future events.

After September 11th, the same government which couldn't figure out that individuals with radical Islamic ties learning to fly but not land planes posed a threat to our national security passed the Patriot Act and created the Department of Homeland Security.

After the financial crisis of 2008, many are seeking new powers to regulate under the same agencies (the Federal Reserve, the Treasury Department and the Securities and Exchange Commission) which failed in the first place.

We should always be skeptical of those calling for new regulations. Perhaps if we had fewer regulations, the government would be more successful in enforcing those which actually protect the environment and safety, while individuals would take their responsibility as consumers in the market more seriously.

Thursday, May 13, 2010

Pension Funds and Other Random Thoughts

Wow, I am tired today. I can usually operate on five hours of sleep, but not three. Starbucks saved me around 8:30am. I had to wake up very early to pick up a $5,000 check for the Libertarian Party of Ohio. This, combined with another new donation of $4,000 is proof that individuals are starting to place confidence in what we are doing. No, we are not going to be able to compete financially with the Democrats and Republicans, but we are steadily improving our financial position every day.

Some people out there have to be wondering: What keeps this guy going? Well, it's you, the fan(s). I am up late every night knowing that if I don't write new material by 6:00am, someone will go a day not reading something that needed to be said. Maybe this blog will be soon be a "must read" for someone. That is my hope.

To me, the key takeaway from this article is "Why is the Deputy Treasurer and Chief Financial officer leading these charges, rather than the Treasurer of State?" The answer, is what the Libertarian statewide candidates have been saying all along: The individuals elected to these offices are career politicians who are interested in their next office, not in doing their job.

Another key statement is the following: "What OP&F owned was managed by a quantitative model-driven account that triggered buys and sells based on a formula that looked at many market factors," David Graham said in a statement.

For those translating at home, in English this means "We have no freaking clue." Models and quantitative analysis are important, but only if you have a human with foresight interpreting them. I personally knew by very early 2008 that Lehman was done. I wasn't really aware that it was a secret. I know that the Treasurer's office isn't directly responsible for pension fund decisions, but where is the leadership? Maybe this is naive, but is it too much to ask for the Treasurer pick up the phone and have a conversation with the pension fund managers about it if it is going to save Ohio $480 million?

In my mind, this is further proof that we need new leadership in these Executive offices. I urge you to look into all of our statewide candidates. We have a team that is ready to lead.

Speaking of "must reads" here is my list every morning:

Simply put, the best of libertarian thought (from a policy standpoint).

I liked the WSJ much better when I was in school and it was free, but nevertheless a must read. I never have time to read cover to cover, but try to hit major stories, a few special interest stories and the opinion page.

I often do not agree with their writers, but they do have excellent writers. They challenge me, which is something we all need. Megan McArdle is a self described small "l" libertarian, so I read that blog regularly.

I know it loses me a few votes in Ohio, but I do enjoy the Post Gazette as a local paper more than the Columbus Dispatch. Don't get me wrong, much of the Post Gazette is ridiculous (editorials and sports for example). But this is what makes it so great. I have never read the Post Gazette without laughing at least once.

Great for polls and for top news stories.

It's hard to take, but yes, I force myself to read Paul Krugman, Maureen Dowd, David Brooks and Thomas Friedman. If you don't force yourself to read things you disagree with every day, you will not be an effective debater or writer.

An incredible blog, dedicated to an incredible mission: Exposing the lies coming out of the MSM, the Government and Wall Street with regards to financial issues. Goldman Sachs at one point blocked the site internally. That says it all.

Last on my list, but I do read Politico every day. While I don't find it useful to know all of the inner rivalries and power struggles, it is very entertaining.

Keep in mind, these sites only get me started on my research. They tell me where to dig, but are rarely if ever my final source on any one topic. Overall, I'd say I typically spend at least four hours reading a day.

I will be in Philadelphia over the weekend, so I will resume writing on Monday. Have a great weekend!

Wednesday, May 12, 2010

What is Debt?

I thought that I'd do a little bit of a philosophical/economic blogging today and talk about a topic that is often discussed, but rarely understood: Debt. Since debt is destroying our economic system, it is very important to understand what it is, why there is so much of it, and what we can do about it.

What is debt? At the most basic level, debt is a promise. It is an economic exchange (just like any other) between two entities which mutually benefit from it. Debt in itself is not bad (though a lot of religious scholars may disagree with me on that). In fact, debt is part of the free market. A borrower is free to desire something which he does not have, and a lender is free to give something he does not immediately need.

When used responsibly, debt can be good for individuals and businesses. If Warren Buffett wants to take out a car loan because he believes the cash he has on hand can be better allocated elsewhere, everyone can benefit (Warren will earn a greater return than the interest on the car loan costs him, the lender will have very little risk of default, and the business which Warren invested in receives capital).

How does the free market account for risk (whether it's inflation risk or the risk of default)? For debt transactions, risk is accounted for by the interest rate.

For example, the following three individuals ask you for a $100 loan: Your rich uncle Bob, your middle class neighbor Bill, and your kid brother Joe. If you have exactly $100 to lend, how would you decide who to lend to? All things equal, you would want to lend to Bob, as you know you will get your money back! But what if all things weren't equal? What if Bob would pay you 6% interest, Bill would pay you 10% interest, and Joe offered you 15% interest? The best deal in this case would be based off of the default risk you estimate for each individual.

In a basic economy where government isn't present, debt can only be created by someone who has money in the first place (by earning it). In the basic sense, debt therefore is a "work for consumption swap". This is another reason debt can be used for positive purposes: it can match needs and wants over time. Some people may view their productivity (work) being worth more in the future, while others may want to defer consumption. Both should have the freedom to do so, as long as they enter into a contract they both agree to.

Debt is real, it is part of the free market, and it can be used for good. So why do so many Libertarians attack "debt"? The answer to this is very simple. There is one entity which never earns and always consumes. The Government does not have to play by the rules individuals have to play by with regards to debt. The Government has very little risk of default, because they can force individuals to pay for their consumption through taxation. If the Government does not have the political will to do that, they can resort to "printing money."

Since all debt is a promise, Government debt is also a promise. However, the promise governments make is not based off of future work and productivity, it is based on taxation and printing. Since these alternatives lower the governments risk of default (compared to me who could lose a job, or a business which could go bankrupt), governments enjoy lower borrowing costs. Remember the example with Bob, Bill and Joe? If we throw in Uncle Sam who can print and tax, who wouldn't want a "risk free" bond at 4%?

It is here where we get into the concept of inflation and inflation risk. If Uncle Sam is paying you back 4% with dollars it is printing (out of thin air), they are devaluing the dollar, and thus the "true" rate they are paying you back is less than the 4% advertised. But wait, how do I escape this trap? There is only one currency here in the United States. If I lend to my brother, my neighbor, or any business, they are paying me back in dollars as well. Maybe I better raise my interest rate to account for this fact. Thus, inflation risk raises the cost of all debt.

But Matt, why is Government Debt so cheap currently? The 30 Year Treasury is at 4.5%. I keep hearing economists talk about deflation, not inflation. Isn't this counterintuitive with all of the printing and borrowing the U.S. Government has been doing? Yes!!

Rates are this low, and the dollar has not crashed for one reason and one reason alone: In 2008, we entered a deflationary period due to overinflated assets (primarily housing) which triggered a worldwide economic recession/depression. There was a "flight to safety" where the United States was still, for all of its faults and weaknesses, the place to run to. For the time being, we are still the strongest economy and have the most stable political system. Thus, we are still the "reserve currency" of choice.

I have a simple question to leave everyone with: How much longer do you think we will be the "currency of choice" if we do not address our fiscal crisis?

The answer you gave to that question is when the real economic crisis will hit, if we do not change course immediately.

I promise you, we haven't seen anything yet.

Have a good morning!