Shooting the Messenger

I've seen many things written about the S&P debt downgrade now to form an opinion. That opinion is that democracy doesn't work because most people are too stupid to vote for things that affect me. Thus, I'm an anarchist. Okay, bitching aside, let's think about the downgrade and what it means.

A debt rating is a (not the) measure of the probability that an entity will default on its debt. Default means missing an interest payment at least, and can end up with the entity declaring bankruptcy in extreme cases. Now, as I teach my students, it is technically impossible for the U.S. government to be forced into default because the U.S. government prints U.S. dollars, and issues bonds denominated in U.S. dollars. In fact, because dollars are zero-maturity debt securities, or zero-discount bearer bonds, the only difference between a bond and a dollar is the time to maturity.

So what does the downgrade mean if it doesn't mean that the U.S. government is closer to being forced into default? It means that it is closer to a strategic, or voluntary, default. Strategic default can take two forms: monetizing the debt by printing enough money to pay off the debt (see Weimar Republic post-WWI); or it can repudiate the debt, and essentially say "Chuck you Farley, we aren't paying the money we owe!" Each method has costs and benefits, which I will not analyze now. Maybe later.

What I want to talk about is the reaction to the S&P downgrade. Apparently the SEC is investigating S&P for evidence of insider trading, even though no abnormal trades were detected.I've seen many pieces arguing that the S&P downgrade itself is a problem for the future. Treasury has argued with them that they made a math error: it was actually a difference of opinion regarding the growth rate of government spending. So people are pitching a fit because S&P has said publicly what most of us already know: government spends too much.

This is how children behave when Daddy takes away the credit card. But Daddy hasn't done that yet. More like Mommy has come in, said "if you keep spending like this, Daddy will take away the credit card." And the kids have a tantrum and complain about how mean Mommy is. All this amounts to killing the messenger and failing to get control of the real problem. The discussion that needs to be had is: what should government do? The steady growth of government control over the centuries, especially during the 20th, have brought us to this point. Europeans might want a big government, but do Americans? Some do, which brings me back to the first paragraph.

Flights to somewhere with no one on board

An incredible story about unbelievable waste.  I almost couldn’t believe what I was reading.  Taxpayers subsidize flights to and from rural airports, often with no one on board. 

Height of Hypocrisy!

Here’s a story about a small bank in Texas throwing in the towel after 27 years.  Bank executives blame federal (and probably state) regulations for the decision.  Maneuvering the ever-expanding web of federal and state regulations proved too much.   They’ve had enough, and town residents have one less choice now.

In the story, regulators fire back saying they need to ensure banks don’t assume too much risk, which, they say, contributed, in part, to the 2008 financial (near) meltdown.  And to be clear, too much risk means risky lending.

So, let me get this straight.  Federal regulators can scrutinize bank lending to the nth degree, but our government (their employer!) can borrow trillions with impunity.  (Only recently have people begun to realize the enormity of the problem).

It’s like the Boatswains are so worried over the brass tarnishing that they don’t notice the Captain steering the ship straight for Davy Jones ’s locker.

What's the Worst that can Happen?

It’s easy to sucked into a pit by all the doom and gloom in the news.  The S&P dropped about 6.5% today, on top of big losses last week.  The debt deal has many unknowns, except the light it shed on our unfunded liabilities that tower into the trillions of dollars.  Unemployment remains stubbornly high at over 9.0%, and GDP growth was an anemic 1.3% last quarter and almost non-existent in the first quarter.  So, what’s the worse than can happen?

Why are still slogging along two years after the Great Recession?  This was to be the summer of recovery (or was that last summer?  I forget).  We are seeing rising food prices, rising energy prices, flat or dropping home prices, but (except for the last 4 days) rising equity prices.  Interest rates are practically zero (which sucks for savers like me!) and mortgages are cheap, if you can get one.  We seem to be stuck in a persistent state of malaise.

Is all this mess due to uncertainty?  Uncertainty about,

·         2014 – main provisions in Obamacare kick in, or

·         2012 – huge presidential and congressional election, or

·         2012 – tax rates will revert back to 2001 levels?

But what’s the worst that can happen?  Is there a scenario where the US and world fall into financial ruin?  Would the trigger be hyperinflation or Europe goes bust?  And are these likely scenarios?  I often wonder what my great-grandfather thought as he toughed it out during the Great Depression, or my grandfather who fought in WWII.  I’m sure they occasionally thought they were living in the end times.  But they survived.  Will we?

Incentives are key to fixing healthcare

This year I tried something new.  I signed up for a high-deductible health plan.  After a little research, I decided to leave my traditional health plan and opt for a consumer driven one.  And this decision has made me a more conscientious consumer of health care.  Here’s how it works.

On January 1, United Healthcare deposited $2,400 into my health reimbursement account.  I can use this money anywhere I wish so long as the expenses are health related.  I can’t buy a bag of chips with it, but I can use it for doctor’s visits, prescription drugs, and the like.  Each time I transact with a health care provider, the fee is deducted from my account.  Should I not use all the funds by December 31, they roll over to the next year – up to $10,000 for a family. 

 

Here’s the incentive part.  If my HRA runs dry during the year, my health care provider (United Healthcare) won’t begin paying for my doctor’s visits and drugs until I reach my deductible of $3,600.  That means I have come out of pocket $1,200 before my “traditional” insurance kicks in.  (1200 out of pocket = 3600 deductible – 2400 HRA deposit).

This arrangement has made us consider carefully every doctor visit, drug, and other medical expense because we really want to ensure our $2,400 lasts us throughout the year.  For example, yesterday my wife took our 8 year to the doctor.  She was complaining of a sore throat and running a fever.  The doctor swabbed her throat (negative for strep) and prescribed an antibiotic for a sinus infection.  The doctor wanted to send the swab off to another lab for additional testing – testing we would have to pay for. So we declined and saved that unnecessary lab fee (the results of the lab would not have changed the doctor’s remedy – an antibiotic).

Traditional insurance removes the incentive to make consumers savvy shoppers of healthcare.  We plunk down our insurance card, fork over a small co-pay, and couldn’t care less what happens after that. If we want to change people’s behavior regarding healthcare, this arrangement has to change.

Absolute Tyranny

Living in America in 2011, it’s hard to imagine what absolute tyranny entails.  We hear the term tossed around from time to time, but I suspect few of us really understand what absolute tyranny looks like.  Even the poorest of Americans enjoy a life a million times more abundant than those unfortunate souls in North Korea.

Life in North Korea is harsh, short, and repetitive.  Liberty does not exist, only complete commitment to the Dear Leader.  Consistent and daily propaganda, assisted by Confucianism, has reduced the population into automons, existing only to worship Kim II Sung, who died in 1994, and his murderous son, Kim Jong-il.    They are idolized as gods.  They are actually tyrants.

North Korea is the most reclusive nation on earth.  Outsiders, when allowed in, are under constant supervision by “guides”.   A drive around Pyongyang bears witness to oddly- empty streets and towering buildings with few occupants.  Famine is everywhere and electricity is almost nowhere.  Visitors are escorted to hand-selected venues where Korean school children perform dances and play music.  It’s all a façade.  The real Korea is off-limits to outsiders.  The real Korea is most likely filled with unspeakable horror, starvation, and death.

I asked myself why children continue to be born.  As a sane, rational human being, I would not want to subject my children to the tyranny of North Korea.  Perhaps, copulation is forced.  Freedom is nonexistent in this hermit country, but substituted with the grim reality of a difficult and short life.  An early death may actually be a blessing in North Korea. 

  

Here’s a video (about an hour in length) that will help you understand absolute tyranny.