The National Intelligence Bulletin is a weekly look at threats to social, political, economic, and financial stability in the United States, and provides early warnings and indications of America’s volatile future. This report is available each week for Intelligence subscribers.
In this National Intelligence Bulletin…
- InFocus: Is the national debt really a problem?
- Shutdown Redux?
- Haidt: Break up of Western democracies
- Abrams: ‘Identity politics bring us closer together’
- Far Left Politics Roll-Up
- Leftward swing will threaten financial and economic stability
- States and deficits
- Student loan debt crisis remains on the table
- Economic/Financial Watch commentary
InFocus: Last week, I wrote about a Foreign Affairs op-ed written by Larry Summers, a former World Bank chief economist and Obama-era economic advisor. He talked about this concept called “Modern Monetary Theory” (MMT), whose proponents say that the national debt is not a problem because the U.S. government is a currency issuer.
Here’s the gist of MMT: the U.S. government doesn’t need tax revenue to pay for spending, because it can just issue itself new currency. In other words, the U.S. federal government “can never go broke” because it can issue the currency it needs to spend. Government spending in the right places would increase aggregate demand, which would create a cycle of prosperity, regardless of how large the national debt is.
As for runaway inflation from so much currency being flushed into the system, MMT says that demand for U.S. dollars would be sustained by tax payers, who pay taxes in USD, and foreign trade, purchasers of U.S. goods and services in USD. [source] Foreign investment in real estate, the stock markets, infrastructure, and other businesses — all done in U.S. dollars. In other words, MMT argues that this continued or increased demand for the USD would combat inflation. And if inflation began to accelerate, then the government could curb its deficit spending until inflation normalized.
Why does this even matter? Because the progressive Left is moving to Modern Monetary Theory for fiscal policy . Sen. Elizabeth Warren, regardless of how likely or unlikely her presidency is, this week stated that cutting government spending in some places to increase spending in other places “doesn’t make any sense” and that we should “rethink the financial accounting” of the federal government. In other words, she appears to be adopting the MMT view that deficit spending and national debt don’t matter, because the government can print money as necessary in order to increase demand as needed. Furthermore, proponents of MMT like to point out that new spending, including direct payments, would be targeted towards lower economic classes who don’t save money and instead spend it all. That, they say, would keep the money contained and circulating in the economy, which increases overall demand, which would lead to economic growth.
I spent some time this week looking into MMT and it has a surprising amount of political support. Senators Bernie Sanders, Cory Booker, Kirsten Gillibrand — all potential Democratic presidential candidates — advocate for MMT. And although she doesn’t specifically mention MMT, that quote from Elizabeth Warren — that spending offsets “don’t make any sense” and that we should “rethink the financial accounting” of the government — is obviously a reference to her support for MMT, as well.
To be sure, the United States is in between a rock and a hard place concerning the national debt. In theory, MMT sounds like a magical cure to the country’s fiscal woes. Deficit spending in the right places, they say, could bring about a more equal society with no long term risks of a skyrocketing national debt. But in practice, presuming that it would work at all, MMT would require very fine-tuned decision making for which U.S. officials so far have shown no capacity to perform. Even the Federal Reserve, the current arbiter of the U.S. money supply, makes future policy directions based on lagging indicators and are prone to err (unintentionally precipitating recessions).
By now it’s no surprise that President Trump will frame his 2020 re-election campaign on the contrasts between the Trump economy (economic nationalism and the equality of opportunity) and the socialist economy (internationalism and the equality of outcome). He does face some potential third-party risks: a recession or financial crisis that could doom ‘capitalism’ as we know it in the minds of voters. Regardless, even if the next recession is short, demographic trends increasingly skew to the Left, and America is on the cusp of getting a real taste of socialism once Democrats get back into power. That could be as soon as 2020 or 2024. We’re not talking about social programs but real, top-down, centrally-controlled, ‘fundamentally transformative’ public services.
I wrote last week that Democrats could turn the United States into Venezuela. Some of you may have scoffed. It’s certainly a worst case scenario, but a long, painful recession like a ‘lost decade’ scenario marked by high unemployment, social strife and class violence, and a market crash, combined with socialist economic policies and progressive social policies, would push us over the edge of fiscal reckoning — $22 trillion in national debt, $8 trillion in corporate debt, $4 trillion in consumer debt, a $6 trillion pension shortfall (public and private; nationwide), and $184 trillion in unfunded liabilities over the next 30 years (assuming moderate economic growth). It’s a worst case scenario, but there’s a very bleak picture that can be painted here. And, more importantly, there’s a way to get there. – S.C.
Addendum: I came across this quote from a military strategist I read:
“All states weaken, collapse, and eventually disappear. There is no compelling reason why this given wisdom will not see the United States one day join once imperial Rome.” – Colin S. Gray
Priority Intelligence Requirements
PIR1: What are the new significant indicators of disruptive political, social, or cultural conditions or events?
PIR2: What are the new significant indicators of threats to economic or financial stability?
PIR1: What are the new significant indicators of disruptive political, social, or cultural conditions or events?
- Ongoing political instability due to high stakes political warfare
- Removal of political guardrails increases risk of reaction
- Simmering social grievances based on race, class, and political ideology contributing to sporadic violence
- Ongoing culture war features information operations and economic warfare
Next Friday night, the government is scheduled to go into another partial shutdown. It’s possible that the government will shut down again, however, two key politicians say that it won’t. Speaker Pelosi: “There will not be another shutdown. No, it’s not going to happen.” And chairman of the Senate Appropriations Committee, Richard Shelby (R-AL), who’s heading up the team of Republican negotiators, said that Republicans and Democrats will reach an agreement this weekend to avert another shutdown.
Haidt: Break up of Western democracies
Responding to questions about Facebook’s impact on democracy, New York University professor Johnathan Haidt predicts that by 2030, a Western democracy will break apart. “The second potentially gigantic problem is that large, diverse, secular democracies are inherently unstable, inherently prone to division unless there are sufficient “centripetal” forces pulling toward the center (such as having a shared language, shared rituals and values, and high trust in the basic political and economic institutions of the country)… I predict that by 2030 we will see the spectacular political collapse or geographical division of more than one Western democracy.” [source] (Analyst Comment: Social media, and especially Facebook, has been accused of enabling echo chambers and ‘bubbles’ of information, where users are rarely exposed to alternative or competing ideas. In fact, Twitter at one point considered forcing users to be exposed to competing view points in order to break up these info bubbles. And I think this is what Professor Haidt is describing: social media enables tribalism, which will aid in the breakup of a Western democracy, as he predicts.)
Abrams: ‘Identity politics bring us closer together’
In a Foreign Affairs argument last month, Stacey Abrams — a rising start on the Left who gave the State of the Union rebuttal — says that identity politics should be embraced, instead of shunned. According to Abrams, the Left can use identity politics to drive social change and, finally, political change. “Americans must thoughtfully pursue an expanded, identity-conscious politics. New, vibrant, noisy voices represent the strongest tool to manage the growing pains of multicultural coexistence. By embracing identity and its prickly, uncomfortable contours, Americans will become more likely to grow as one.” [source] (Analyst Comment: Like Professor Haidt writes above, centripetal forces are what keep free societies together. Like a gyroscope’s center of gravity — in our case, a common identity — once it slows down, it begins to wobble and it eventually crashes. I really do feel like that’s where we’re headed with regard to competing social bases in America.)
Far Left Roll-Up
“It’s worth keeping all of this in mind when you hear critics (or journalists) describe the economic proposals of the Democratic presidential candidates as ‘radical.’ They’re not radical, for the most part… These wealth taxes are a classic example of policies that are less radical than their opponents claim.” – David Leonhardt, New York Times Opinion writer
“It’s open season on the wealthy… with the premise that ‘every billionaire is a policy mistake… But people should think twice before seeking to flatten every tycoon. It may seem counterintuitive, but billionaires can be good for democracy, and a bulwark against tyranny.’” – Fred Hiatt, Washington Post Editorial editor
“Surveys are showing overwhelming support for raising taxes on top earners, including a new POLITICO/Morning Consult poll released Monday that found 76 percent of registered voters believe the wealthiest Americans should pay more in taxes.” – Reported at Politico
“I am talking about the radical conservatives in the Democratic Party. That’s who we need to counter… pay-as-you-go, free college, ‘Medicare for all.’ These are all enormously popular in the party, but they don’t pass because of the radical conservatives who are holding the party hostage.” – Saikat Chakrabart, chief of staff to Rep. Alexandria Ocasio-Cortez
“There is going to be a war within the party. We are going to lean into it.” – Waleed Shahid, spokesman for Justice Democrats, a political organization that pushes democratic socialist candidates
“So if a bunch of disinformation is used to manipulate public opinion by pushing … oh, let’s just say stories about George Soros being a Nazi and a baby killer reptilian, that’s an attempt to silence him and his supporters and thus it now ceases to be free speech.” – Brooke Binkowski, former Snopes.com editor
“It’s not just that [Howard Schultz would] help re-elect Donald Trump, but that he came across as a spoiled billionaire more concerned with protecting his fellow billionaires from paying a lot of taxes than protecting Medicare and Social Security for the middle class.” – Democrat pollster
“We are going to take an MRI to any Russian financing that the Trump Organization and the president may have had.” – Rep. Eric Swalwell (D-CA)
“It’s a big legislation [the Green New Deal] because it’s a huge [expletive] problem! We’re all going to die. Every week it seems like the the risks of climate change become more real, and the amount of devastation it is going to wreak upon humanity becomes larger, and that means we have to do bigger things.” – Sean McElwee, Data for Progress
Asked if the Green New Deal requires “massive government intervention”: “It does…Yeah, I have no problem saying that.” Later she says, “One way the Right tries to mischaracterize what we’re doing as though it’s like some kind of massive government takeover…obviously it’s not.” – Rep. Alexandria Ocasio-Cortez
“We are standing on Native land, and Latino people are descendants of Native people. And we cannot be told and criminalized simply for our identity and our status.” – Rep. Alexandria Ocasio-Cortez
“For reasons both substantial and practical, we believe [Trump’s] disgorgement by Republicans can happen, might happen — and should happen. Contrary to conventional wisdom, removal by his party would be as healthy for America’s democracy as his removal by the voters, perhaps more so.” – Raunch and Wehner, writing for the New York Times
PIR2: What are the new significant indicators of threats to economic or financial stability?
- Trade war with China poses risk to U.S. farmers and manufacturers, emerging markets
- Slow in global economic growth poses risk to emerging and developed economies
- Unsustainable national debt to increase due to trillion dollar budget deficits
- Strong potential for an economic recession around 2020 that causes significant financial disruption
Leftward swing will threaten financial and economic stability
One of the most important developments outlined in previous reports is the Leftward swing of the Left’s political candidates. Writing for the Left-leaning Washington Post, Editorial writer Fred Hiatt concludes, “Today, having captured the House and feeling optimistic about 2020, Democrats are focused more on how they might wield power than on Trump’s potential abuse of it.” And how they might wield power is one threat scenario we face, possibly as soon as two years. Whereas the Trump/MAGA coalition secured a beachead for right wing populism, I expect the ‘civil war’ currently under way in the Democratic Party will lead to left wing populism in 2020 and beyond.
Let’s look at Justice Democrats, the political action committee currently pushing democratic socialist candidates like Rep. Alexandria Ocasio-Cortez (D-NY). Justice Democrats spokesman Waleed Shahid says, “There is going to be a war within the [Democratic] party. We are going to lean into it.” Fundamentally, this is a battle between establishment neo-liberals and the more progressive wing which supports democratic socialism. The common complaint is that neo-liberal policies have failed and that neo-liberal support for capitalism has led to extreme wealth and income inequality, and it threatens socioeconomic stability today. This is basically a battle over capitalism and private options for government services. Should private options exist for healthcare, pensions and retirement? The “ascendant wing of the Democrat Party” will fundamentally transform the United States once they get into power.
“The theory driving the ascendant [democratic socialist] wing of the Democratic Party is that moderate solutions simply don’t go far enough to meet the challenges we face,” said a former Biden staffer. And the democratic socialist wing is thrilled that most Americans may actually favor higher taxes on the wealthy. According to one poll, 74 percent of Democrats and half of Republicans supported some form of Senator Elizabeth Warren’s (D-MA) “wealth tax”.
Now let’s bring this full circle: we know the major reason why the nation’s wealthy citizens and corporations choose to store their money overseas. Lower taxes and better interest rates. We can look at New York and California where regulatory burden and high taxation is driving residents out of those states to more business-friendly places like Texas. Now apply a “wealth tax” and higher federal income taxes under a democratic socialist administration, and we’re likely going to see capital flight as a result. More Americans will be pulling their money out of the markets to meet the tax burden or stash it overseas.
States and deficits
This week, New York Governor Andrew Cuomo (D) announced that New York was facing a $2.3 billion budget deficit. Trump’s 2018 federal tax cut law caps deductions of state and local taxes at $10,000, instead of the previous $22,000. As predicted, this hit wealthy blue states like New York. After saying that “this is worse than we anticipated,” Cuomo continued: “This is the flip side [of high taxes]. Tax the rich, tax the rich, tax the rich. The rich leave, and now what do you do?” [source]
Analyst Comment: State deficits in the future won’t be limited to budgets. Cumulatively, the States have a $1.4 trillion pension funding shortfall. And private and public pensions nationwide face a $4-6 trillion shortfall. Here’s the problem and why it’s likely to worsen: these state pensions are predicated on seven percent annual growth in the markets. They’ve reached that goal in seven of the past ten years, and yet states like Illinois, Colorado, Kentucky, New Jersey, and others are still underfunded. I’ve previously stated my current expectation that we could be facing a ‘lost decade’ scenario with low economic growth and little to no market gains, easily for a few years if not a decade. If pensions are underwater now, then with low growth and possibly market losses, some pension systems could be facing outright insolvency. Looking ahead, the president and the Federal Reserve could be looking at a choice of bailing out state pensions, similar to the 2008 bank bailouts. Regardless of how this problem is fixed, state governments, pension managers, and pensioners are going to face some difficult decisions and unfortunate developments. This is another reason why 2020-2030 is my financial reckoning ‘dead zone’ as far as SHTF events are concerned.
Student loan debt crisis remains on the table
We could still be headed towards a student loan debt crisis. Here’s a chart (top) from the St. Louis Fed which shows nonrevolving debt, much of which is student loan debt, as it climbs to new highs. Up, up, and away. The second chart (bottom) shows the same outstanding nonrevolving credit compared against disposable personal income. If disposable income were rising at the rate of debt accumulation, that graph would be flat. Instead, debt is being accumulated at a higher rate, even as the “Trump bump” put more Americans back to work. Disposable income has risen every since 2013 yet is still being widely outpaced by increases in nonrevolving debt (which also includes car loans, another potential bubble valued at $1.1 trillion). Something isn’t right.
It’s not just the next recession that poses the potential to trigger this crisis. Last month, one theme at Davos was the outsourcing of American white collar jobs overseas, which is already happening. Plus, advances in artificial intelligence over the next decade will displace more and more American workers. Student loan debt sits right around $1.5 trillion, and most of that is loaned by the federal government. Seeing the potential for a job loss tsunami, I question how $1.5 trillion is going to be paid back by unemployed and underemployed college degree holders. It won’t.
Democrats have a plan to fix Social Security: raise taxes on workers. In a bill promoted by 200 House Democrats, Social Security recipients would see increases in benefits while Americans would see payroll tax increases from 12.8 to 14.8 over the next two decades. It would also raise the ceiling for income which is taxable to $400,000. Right now, workers contribute to Social Security only on the first $132,900 of their earnings. The Social Security Administration says that the program will be insolvent by 2034 unless changes are made. [04 Feb]
According to a Fox News survey, some 54 percent of Republicans and 70 percent of American voters support higher taxes on the uber rich. New taxes are unlikely to achieve “fairness”, but are certain to lead to more authority of the federal government. [source] [04 Feb]
JPMorgan is looking at the Fed’s recent dovish behavior and questioning the timing of the next recession. Because the Federal Reserve didn’t raise interest rates (and said that they’d be flexible on monetary policy), JPMorgran strategists believe “2020 might not be a year to think about recession and so late 2019/early 2020 would be premature” to move to defensive positions. [source] [04 Feb]
Interesting: This chart from HowMuch, which shows the average credit card balance for residents of each state. [source] [05 Feb]
“Economists are reassessing their belief that technological progress lifts all boats and are beginning to worry about the new configuration of work.” – New York Times article on how automation and robotics will heavily affect low wage workers [source] [05 Feb]
Lots of information about the Fed is out this morning, and much of it provides some insight into the future of the next economic downturn. The Fed is set to implement another round of stress tests on banks this year to see how banks can respond to harsher economic conditions. Banks will face a simulated 10 percent unemployment rate — the highest yet — and falling commercial and house real estate prices, while providing a plan to maintain lending despite a series of loan defaults. Additionally, this year’s stress test will assume -9.4 percent real GDP growth, which is the worst contraction rate since the tests began. Real messy stuff for the banks, which will respond to the tests by 05 April. The results are expected to be published in June. [06 Feb]
Meanwhile, the IMF proposed recently that it could have two different interest rates for the next downturn — one rate for cash held by consumers and one for electronic money held by banks on digital balance sheets. By having two rates, the IMF could impose negative interest on electronic money held by banks, while stores and businesses could have separate prices for electronic money and cash purchases. “This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash,” wrote one IMF economist. Take away: the next economic downturn may be so troubling that the IMF resorts to these type of interest rate acrobatics to keep countries afloat. [06 Feb]
Back to the Fed, the Federal Reserve Bank of San Francisco published its most recent Economic Letter, in which they argue that negative interest rates could have sped up the post-recession recovery. [source] This letter signals the potential for the Fed to pursue negative interest rates during the next recession, which may now be more likely considering that the Fed doesn’t expect to raise the federal funds rate any time soon. The Fed has traditionally cut interest rates by three percent during a recession in order to spur growth. The federal funds rate right now is 2.4 percent, just short of the three percent mark that has to be cut during the next recession. With investors and the markets (and the president) responding negatively to recent interest rate hikes, the Fed will have a tough time moving interest rates higher unless the economy begins to overheat again. Since economic growth in 2019 is widely seen as starting to slow, maybe even the Federal Reserve doesn’t how much higher interest rates will go, if any higher at all. And that leaves the Fed with less than three percent cuts that it’s traditionally required. Going sub-zero looks like an option, which could spark a rush to cash and other stores of value that don’t lose purchasing power due to negative interest rates. [06 Feb]
Senator Brian Schatz (D-HI) is reportedly going to introduce a bill that would tax high frequency traders at 0.1 percent of the trade’s value for every trade. High frequency trading is algorithmic, done by computers, and has been blamed for ‘flash crashes’ of stock prices. The tax would be expected to raise $777 billion over 10 years and could go towards free college tuition plans. This is the latest tax idea coming from Democrats and is a good indicator that across-the-board tax hikes are coming once Democrats get back into power. [07 Feb]
Speaking last night, Federal Reserve chairman Jerome Powell had positive things to say about the economy. “The U.S. economy is now in a good place. Unemployment is low, prices are near two percent inflation, so we’re in a good place now.” Powell continued to say that some things to keep in mind over the next 10 years are that: 1) growth in per capita income for the middle and lower classes is decreasing; 2) labor force participation is going to be dependent on job training and education; 3) productivity needs to rise in order to raise wages; and 4) “[T]he prosperity we do achieve is widely spread… [W]e need policies to make that happen”. Powell said that this is not the Fed’s job, but stressed the importance of worker education and policies that would lead to better social mobility. Another Fed official, speaking about global financial risks (such as in China or Europe), said, “That will be what I, at least, will be looking at over the course of the next six months.” [07 Feb]
Speaking on Bloomberg, Alberto Gallo (Algebris Investments) said that his firm doesn’t foresee a U.S. recession within the next 18 months. Additionally, David Kostin, Goldman Sach’s chief U.S. equity strategist, said that fear over a recession has receded for 2019. [07 Feb]
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