King Derwin's Magicians -- and Ours

Waiting on Economists'
"Chants and Charms?"

"A mighty good chant," said the King, looking very pleased. Are you sure it will work?"

All the magicians nodded together.

"But," said the King, looking puzzled, "How long will it take?"

"Be calm, oh, Sire, and have no fears," chanted the magicians.

"Our charm will work in ten short years."

--"The 500 Hats of Bartholomew Cubbins," by Dr. Seuss

Watching an inspired production of the famous Dr. Seuss story by The Children's Theatre yesterday, I couldn't help noting the parallels between King Derwin's magicians, and Barack Obama's economic magicians.

Just like Dr. Seuss' magicians, our government magicians profess confidence that their "spell" -- TARP, zero percent interest rates, quantitative easing, etc. -- will have the desired effect.

King Derwin pronounces the magicians "fools," and promptly dismisses them.

Meanwhile, in the real world, we are giving our latter-day magicians more power, and waiting for their chants and charms to work.

P.S.: How do you say "economist" in Japanese?

(Corporate) Waste Not, Want Not

Corporate Campaign Contributions

In Citizens United v. Federal Election Commission, the Supreme Court decided that corporations could spend as much as they wished at any time, assuming there was no direct coordination with the candidate. In doing so, the court overturned its own precedents and refused to distinguish the free speech rights of corporations and unions in any way from those of actual people.

The problem with this logic is that corporations have a legal duty not to spend money unless it is likely to improve profits. Unions, too, are expected to make only contributions that will benefit members.

--Scott Turow, "Blagojevich and Legal Bribery"; The New York Times (8/18/2010)

Turow provides the ultimate rebuttal to those who would argue that allowing corporations to spend unlimited amounts on campaign contributions -- now the law of the land -- has no corrupting effect on democracy.

The argument is based on a legal term called "corporate waste."

Just as former attorney Turow notes -- there are a lot of us former attorneys out there -- corporate waste forbades companies from spending money on anything that doesn't further their profit-seeking agenda (sidebar: profits are good -- it's when they come from political suasion that they become bad).

No shareholder, to my knowledge, has ever brought suit against a company arguing that its campaign contributions were frivolously spent.

Ergo, campaign contributions are money well-spent.

Return on Investment

How well?

Staggeringly well.

To pick just one example, the $500 million or so that big Wall Street firms have given both parties the last decade or so loosened something like $2 trillion in U.S. aid and financial subsidies, both direct and indirect (TARP, ZIRP, guaranteed loans, AIG-style infusions, etc.).

And that's just since 2008!

If you do the math, that's a 40,000% return on investment.

Makes you wonder what business Wall Street's really in . . . .

P.S.: Did you know that, according to the Supreme Court, companies like Goldman Sachs, AIG, and BP are "legal persons" just like you or me?

Funny, I don't recall ever attending a wedding, going to a funeral, or having a farewell office party for someone named "Goldman Sachs."

ZIRP Winners and Losers

Boon For Wall Street,
Goose Egg for Savers

Want to place a bet on how long the Federal Reserve's current policy of zero percent interest rates ("ZIRP") continues?

Consider who it helps -- and hurts:

ZIRP Winners:

--U.S. Treasury (debt service kept artificially low)
-- Wall Street (free money -- how nice!)
--Mega-Corp Borrowers (ditto. IBM just borrowed more than $1 billion for . . . 1%!!)
--Home owners (*kind of)

ZIRP Losers:

--Retirees and other savers

My money's on zero percent interest rates . . .

*Historically, cheap mortgages stimulate housing demand. But cheap money can be trumped by other factors, like falling asset prices, high unemployment, etc.

Proposal: A U.S. "Dividend Holiday"

Tapping Corporate America's Cash Hoard to Reward Investors & Stimulate the Economy

Money is like manure; it's not worth a thing unless it's spread around.

--Thornton Wilder

Let's see if I've got this right . . .

The economy is decelerating now because the federal stimulus to date has run its course, and additional federal stimulus risks drowning the U.S. (further) in red ink and endangering its very creditworthiness.

Meanwhile, corporations sit on the mother lode of all cash hoards -- an estimated $2 trillion for just the S&P 500.

All this, as shareholders have just suffered the worst decade investors have experienced . . ever: nominally down 20% from where they were . . . in 2000.

And that's before accounting for the stock market's sickening volatility, or a decade's worth of inflation that masks even more erosion in investors' wealth (my label for the foregoing toxic brew: 'risk without return').

Three Birds With One Stone

So, to summarize:

The challenge now is to get money into the hands of deserving people -- who will actually put it to good use -- without making future generations pay for it.

Anyone else have a light bulb go off?

Here's mine:

Give corporations an incentive to disburse their cash hoard; then, give shareholders an incentive to spend it.

The simplest way to do that would be to declare a Dividend Holiday through the end of 2010 during which the federal government would waive taxes on all dividends.

Carrot won't work?

Then consider a stick: taxing corporations on excess undistributed cash.

Either way, such a bold step would have three benefits (and few costs):

One. It rewards long-suffering shareholders.

Why is that important?

Abuse shareholders long enough, and eventually they will "take their marbles and go home."

After the 1929 crash, an entire generation learned not to put their money in stocks.

That attitude threatens capital formation, future innovation, and arguably capitalism itself.

Deprive savers of a return on their investment, and they lose their wherewithal to finance their retirements.

Guess where they'll turn to for help.

Two. It takes the money away from overpaid CEO's.

Incredibly, the average S&P 500 CEO now makes almost $10 million annually, up 700% since 1980.

Meanwhile, workers' wages during that time have stagnated, and investors -- to belabor the point --are worse off than they were a decade ago.

As the saying goes, money -- like manure -- isn't worth anything until it's spread around.

Three. It relieves the pressure on the Federal Reserve to print more money, and the U.S. Treasury to borrow more.

According to that famous physics theorem, the First Law on Holes, "when you're in one . . . stop digging!!"

Having dropped interest rates to zero and kept them there, Ben Bernanke is now resorting to raw injections of liquidity (called "quantitative easing") to stimulate the economy.

Enough!

There's plenty of money in the economy already.

The challenge is to get it circulating, productively, again.

The Gold Tax

The $64 Trillion Question

What do rational savers and investors do in an environment of zero percent interest rates, where the daily headlines speculate how long major currencies (like the U.S. dollar) will hold their value as national debts mount?

Switch (at least) a little of their holdings to gold.

Even if that amount is relatively small -- say, 5% of liquid assets -- the effect on global commerce could be huge.

That's because 5% of global liquidity is still a huge number, and it's magnified many times that by something called a "fractional reserve banking system."

"Fractional reserve what???"

If you're not an economics wonk, stop here; however, if you can handle a little bit of brain teasing . . . . read on.

Global Money Supply: How Much?

To figure out how much 5% of the world's money supply is, one first has to estimate . . . the world's money supply.

If you know, send me an email.

However, as best I can tell, a working estimate is about $30 trillion.

That consists of both coins and legal tender, as well as short-term banking deposits, money market funds, CD's, and the like.

While definitions vary, to be included in the foregoing number, the instrument must be liquid -- that is, easily converted to cash and spendable.

Bottom line, defensive savers reaching for financial insurance conceivably could switch something like $1 - $2 trillion of their former paper money reserves into gold.

Or already have.

That's against a backdrop of recession-anxious consumers already upping their "rainy day" funds in case of extended unemployment, unexpected (and uncovered) medical bills, etc.

Cash vs. Gold

What's the big deal if people effectively put a trillion (or two) in their mattress?

Due to something called "fractional reserve" banking -- the system in developed countries today -- $1 on deposit at a bank theoretically can support $20 of loans. That's because banks typically only need to keep $1 in reserve for every $20 they lend.

So, a $1 trillion withdrawal potentially has the effect of reducing lending activity by $20 trillion.

That, in an economy where assets like stocks and housing have already taken multi-trillion dollar hits the last two years or so.

Missing Drain Plug?

To combat this contractionary dynamic, the Federal Reserve and other central banks have been, shall we say, "aggressively" increasing liquidity -- printing money.

Unfortunately, as central bankers have poured money into the global currency "bath tub," they haven't seem to notice that there's a big hole in the drain plug -- if indeed there still is a drain plug.

Ironically, it may even be the case that the more "fiat" (paper) money central bankers create, the more people defensively convert that money to non-fiat forms -- like gold -- to protect themselves.

Addressing this vicious circle -- and removing the "gold tax" -- would seem to be the biggest imperative for today's monetary policy makers.

P.S.: economists have various terms for times -- like now -- when monetary policy seems to be impotent (or worse). They include "pushing on a string," "liquidity trap," etc.