Who Wins and Who Loses in the Bubble Economy?

/by

Earlier this month the California Policy Center released a study that provided additional evidence that the U.S. stock indexes are overvalued by approximately 50%, along with calculations showing the impact of a major downward correction on the solvency of California’s state and local government pension systems. Stocks are now at unsustainable bubble valuations.

Not covered in this study, but equally overvalued, are bonds, which pension systems misleadingly categorize as “fixed income” investments in their portfolio disclosures. CalPERS even went so far as to trumpet their success in earning a 9.29% return on “fixed income” investments in their most recent press release – a healthy return that offset losses elsewhere and allowed them to earn a marginally positive return of 0.61% last year. But “fixed income” investments usually refers to bonds, and bonds are also at unsustainable bubble valuations.

Here’s why bonds are overvalued today: Whenever new bonds are issued at lower fixed rates of interest than the bonds that were issued before them, then those older bonds that pay higher fixed rates of interest can be sold for more money than their original price. This is because on an open market, buyers will price a resold bond at a value calculated to equalize returns. When rates go down for new bonds, the prices for existing bonds go up. The problem is that back in the 1980’s, bonds were being issued at rates as high as 16%, and today, they’re being issued at rates close to zero. After a thirty year ride, interest rate drops can no longer be used to elevate the value of bond portfolios.

At a macroeconomic level, every possible investment in the world is overvalued today, because central banks have lowered interest rates to zero in a desperate attempt to continue a decades long disease in which they have spent more than they’ve collected. Governments got to borrow money for next to nothing, and assets kept appreciating. But the binge is almost over, and unlike the savvy super-rich, pension funds can’t just take their winnings off the table.

New Bond Issues, Rates by Nation – June 2016 (red = negative)
Negative coupon bonds, a desperate experiment that isn’t going to end well.

This is all tedious drivel, however, if you are a unionized public employee in California. Your retirement security is guaranteed by “contract.” It’s the result of deals cut between union “negotiators” and the politicians they make or break. As a government employee in California, if you’ve worked 30 years, the average annual retirement benefit you can expect if you retire this year is worth over $70,000. To honor that expectation, CalPERS is already mid-way through their latest reassessment, a 50% increase to their collections from participating agencies. And if there is a 50% market correction (“fixed income” and equity), expect them to double or even triple their collections from taxpayers.

If you are a private citizen trying to prepare for retirement today after, say, 45 years of work and saving, good luck. Because there is no safe investment left in the world. And while you are likely to have to cope with, for example, suspended dividend payments on stocks that are down 50%, expect your taxes to go up in every imaginable category – sales, property, income, and hidden taxes embedded in your utility bills and phone bills. It will be “for the children” and “for public safety.” And if there’s a vote required to increase the tax, it will usually pass, because most voters don’t pay property tax, or income tax, or if they do, the taxes are indirectly assessed and invisible to them.

This is the oppressive hoax that government unions have perpetrated on the working families they claim they want to protect. They have exempted their own members, government workers, from the consequences of a corrupt financial system where they are leading partners. When governments spend more than they make and have to borrow money, central banks lower interest rates to make it easier to work the payments into the budget. At the same time, lower interest rates goose the value of stocks and bonds, helping the pension funds claim they can earn 7.5% per year. And when the house of cards collapses, taxpayers bail out the banksand the government pension funds.

The next time a spokesperson for a government union speaks disparagingly about Wall Street corruption, remember this: They are partners with Wall Street. They support overspending for their own compensation and benefits, creating deficits that have to be covered by taxes and borrowing. Their pension funds demand high returns, and the bankers comply, with rates that encourage borrowing and deny ordinary people the ability to save. Now that interest rates have hit zero and are even going negative in an exercise of monetary chicanery that has no rival in history, the end is near.

Public sector union leaders need to start remembering they represent public servants, not public overlords who are exempt from the reality that you can only spend as much as you earn. As it is, these union leaders are the overpaid mercenaries of capitalism at its most corrupt.

 *   *   *

This article originally appeared on the website of the California Policy Center.

Populist Unity Can Overcome the Establishment’s Supermajority

/by

Back in 2012, an article entitled “The Forgotten 33%” included a graphic entitled “American Voter Breakdown 2012.” It depicted the U.S. electorate as comprised of 46% who pay zero net taxes, 20% who work for the government and are net tax consumers, the 1% “super rich,” and the “forgotten 33%,” who work in the private sector and earn enough to be positive net taxpayers.

The point of the article, then and now, was that people with an intrinsic preference for big government comprise a super-majority of voters in America. But something has changed since 2012…

AMERICAN VOTER BREAKDOWN 2016

The emergence of Donald Trump and Bernie Sanders as serious contenders to become president of the U.S. reflects a growing awareness among voters in all of the above categories that things can and should be better. The 33% who constitute America’s beleaguered taxpayers were angry four years ago, and this time around they’re furious. Their ire is the most easily explained: Now more than ever, they work long hours for less wages or lower profits, all while being told by the establishment press, by mainstream academia, and by left-wing politicians that they’re “privileged,” and still aren’t paying their “fair share.” If they’re white, they’re told their success is the undeserved result of their color, when in fact they’ve been the recipients of institutionalized reverse discrimination for nearly two generations. And no matter what their ethnicity, they confront soaring prices for housing, health care, and college tuition for their children.

The 33% who work and make enough to pay taxes are angry. And they should be. But what about the 46% who pay no net taxes?

The anger of the 46% takes various forms, nearly all of it justified. Many of them work, but qualify for the earned income tax credit and subsidized health care, which makes them net tax consumers. Many of them would like to work harder, but the only jobs available are part-time with unpredictable schedules which makes it impossible for them to work two jobs. Many of them would like to get a better education, but they are the products of failing schools where teacher tenure is more important than student achievement. And if they’re people of color and haven’t yet been successful, they’re perpetually told by the establishment press, by mainstream academia, and by left-wing politicians that they are victims of discrimination and their failures are not their responsibility – fueling additional anger.

And what of the 20% who work for the government? They are, for the most part, ensured decent health care and a secure retirement. But they are the targets of relentless propaganda from their unions, who have waged a multi-decade campaign to convince them they are underpaid, underappreciated, and overworked. Many of them succumb to this nonsense. Others, and more than a few, are disgruntled for the opposite reason – they resent working for a unionized government where merit means less than seniority, and innovation is a threat.

But why are taxes consuming the 33%? Why are opportunities for good jobs and education being denied the 46%? And why does government get bigger every year but deliver less?

There’s a simple answer. Government unions. Especially at the state and local level, government unions have destroyed our public schools and driven our public institutions to the brink of bankruptcy. These government unions perpetually lobby for higher taxes, bigger government – more employees with more pay and benefits, more job killing regulations, and more programs ostensibly intended to help the less fortunate – regardless of their cost or actual effectiveness. The government union agenda is to increase their power and influence – a goal that has no connection with the public interest.

Government unions control state and local politicians, who in turn control every scrap of legislation sought after by big business. They encourage and enable cronyism. Their union controlled pension funds and their union backed government bond underwriting make them the biggest players on Wall Street. They ARE the “establishment” that has gotten everyone so agitated this time around.

Donald Trump, for all his hapless gaffes and hideous vitriol, is far too intelligent to identify government unions as the root cause of most of the problems in America. Unions make or break Trump’s development projects. And even if Trump did attack the government unions, he’d risk confusing voters, who by and large still don’t make a distinction between public and private sector unions.

Bernie Sanders, despite his belated attempts to pander to the African American left by challenging police organizations, is unwilling or unable to make the distinction between police personnel, whom we are lucky to have among us, and police unions that protect bad cops and intimidate politicians. And even if Sanders did take on the police unions, he would never take on the teachers unions – despite the fact they’ve practically destroyed public education in America.

Populist anger in America today is justified, and there is a unifying target for the anger – the “establishment” as represented by government unions and their clients; monopolistic corporations, America’s overbuilt financial sector, and the extreme environmentalist lobby that provides a phony moral cover for their iniquitous schemes. If public sector unions were illegal, this entire corrupt establishment would be threatened as never before. As it is, this awakening national dissent has seismic power, diffused in all directions, turning only on itself.

 *   *   *

This article originally appeared on the website of the California Policy Center.