The Reign of the King of Debt

“I’m the king of debt,” Donald Trump once said. Apparently, he wasn’t lying.

The U.S. Treasury Department reported today that the national debt has increased by $2 trillion ($2,000,000,000,000) since President Trump took office on January 20, 2017. To be fair, the president didn’t do it all by himself: He had the full cooperation of the Republicans who controlled Congress.

I celebrated by buying some U.S. Treasury notes.

The King of Debt Delivered

The federal government ran a deficit of $205 billion in November, a 48 percent increase from the $139 billion shortfall a year earlier, and the biggest November deficit on record. The self-proclaimed King of Debt, a/k/a President Trump, certainly delivered. And now our children and grandchildren can pay it back. With interest.

At least some of the voters are pleased. The ones who voted for him, that is. I guess they don’t have kids.

Trumponomics

President Trump and his minions on the Hill gave a gigantic tax cut to rich people and corporations this year, which translated into a $1.5 billion tax cut (approx. ) for General Motors. Supposedly all of this was necessary to make America great again. And to win!

Today, GM announced it was shuttering two U.S. assembly plants and two U.S. propulsion plants. In addition to the U.S. workers at those four plants who will be losing their jobs, 15 percent of the salaried staff at GM will lose their jobs as well.

Here is what Wall Street thinks of the cuts. In short, Wall Street loves it. It realizes this means higher margins and more money for the investors. The fact that labor is once again getting kicked to the curb isn’t the concern of the owners.

Meanwhile, U.S. tax receipts are dropping like a rock, further inflating the country’s debt balloon. Consequently, the Government is having to incur huge amounts of debt that our kids and their kids will have to service in the years and decades to come.

Isn’t it great that U.S. citizens thought it was wise to elect the self-proclaimed King of Debt to the presidency?

All of this winning is exhausting.

 

Daniels Is Proving Just How Bad Colleges (and People) Are at Controlling Costs

Mitch Daniels took over the presidency of Purdue University in 2013. They have yet to have a tuition increase on his watch. That, quite frankly, is remarkable in the world of higher ed and, perhaps, even unimaginable in a world in which annual tuition increases are a given. For more details, I refer you to this Inside Higher Ed story.

I’m particularly fond of the Daniels story because he’s proving me right. And everyone likes to be proved right.

Since becoming intimately familiar with the world of higher ed, when preparing for and then occupying the presidency of a college, I’ve contended that annual increases in the cost of a college education were not inevitable, as many claim, but were, in part, the product of gross mismanagement, namely, the pathetic inability of college trustees, administrators, and faculty to control their costs. Stated differently, higher ed is smothering in waste, inefficiencies, and extravagant spending.

They get away with it because students and their parents are willing to pay the ever-rising prices, in tuition, fees, and room and board, and are willing to go into debt to finance these purchases. Moreover, thanks in part to the cartel called the accreditation system, the competition isn’t there to constrain price increases, as it is in many other industries. But that doesn’t make it right or without consequences.

One of the consequences is student-loan debt, which is now in the neighborhood of $4 trillion. Not that most college trustees, administrators, and faculty care. They don’t. If they did, Daniels would have more company in his campaign against out-of-control spending. And Purdue wouldn’t be alone in holding the line on tuition increases for seven straight years.

Colleges and universities mismanage resources on so many levels. But, of course, they’re not alone. Their bad habits are shared by other nonprofits and governmental agencies — organizations that are not accountable to investors. But it’s not that all for-profit organizations excel in this regard. They don’t. Many of them do a poor job of controlling expenses, too. But, overall, they do a far superior job than their nonprofit relatives.

It will be harder for other colleges and universities to peddle their excuses now that Daniels and Purdue have shined the spotlight on them. Yet I don’t expect much to change for most institutions. They’ll continue to increase prices every year.

There’s only one thing that will bring about change, and that’s competition and consumer awareness. If and when students stop enrolling because there are better values to be had elsewhere, then and only then will boards of trustees hire administrators with the skills and guts to act in the best interests of the students.

But there’s a bigger lesson to be learned here, Vera, for what we see in the world of higher ed and organizations generally, we also see play out in the world of household finances. Continue reading

The Transformation of a Government into a (Bankrupt) Bank and Insurance Company

The U.S. Government now holds over 30 percent of all consumer debt. When you add in all the federal mortgage guarantees, it’s clear that our national government has slowly but surely become one huge bank underwriting the leveraging of its citizens’ balance sheets.

But, of course, that’s not all. The national government also is one humongous insurance company. It’s called Social Security, Medicare and Medicaid.

I’m not suggesting this role the national government plays in financing and insuring its population is bad. Or good. That’s for you to decide. But it certainly is dramatically different — from what it was 100 years ago, that is.

You might ask, How can the government afford all of this? After all, many borrowers default on their student loans, meaning the government (more precisely, its taxpayers) have to absorb those losses. Plus, the social safety net programs run at a large deficit, which will grow exponentially over the next few decades as baby boomers retire and put unimaginable strain on the Social Security and Medicare systems. So how indeed does the government afford to keep these programs alive?

It’s simple: it borrows. How ironic that the country’s largest bank and insurance company also is one of the world’s largest debtors.

And who does it borrow from? Lots of lenders, including real banks, insurance companies, pension funds, endowments, individuals and a host of countries, the largest being China.

But surely there must be a limit to what constitutes prudent borrowing, you might ask. History tells us there is. More specifically, history tells us that once a country’s debt exceeds 90 percent of its GDP, the debt becomes a drag on growth. Well, ours has or will soon exceed those levels, meaning that it’s likely we’ll grow slower than our potential and that our standard of living will suffer.

That shouldn’t come as a surprise to anyone. But, for reasons I don’t fully comprehend, we’ve decided to take from our children and their children so we can have more today. That tells you something about our character, I suppose.

The other thing that can happen — and which may be happening now — is that the debtor nation’s currency can become less valuable. If that happens, inflation can ensue, further eroding purchasing power and the debtor nation’s standard of living. Given how the U.S.’s currency has been reacting lately (somewhat akin to an emerging market country’s currency, which, of course, isn’t good), it’s possible we’re beginning to see that erosion accelerate. But we still have a ways to go before it becomes a problem. The concern, however, is that these things can unravel quickly. And when they do, it will be too late to reverse the effects.

All and all, it’s a troubling development, this transformation of our national government into a bank/insurance company. Perhaps it wouldn’t have been so bad if we had decided to bear a larger portion of the costs as they were incurred. But we didn’t. Instead, we decided to put the bill on our national credit card. While cutting taxes for the wealthy. Surely, over the long term this is a disaster in the making.

It might be a good time to convert some of those savings to renminbi.

The Thing American Exports that Trump Is Failing to Mention

In this whole discussion about tariffs, President Trump makes it sound like America’s trade deficit is larger than it is. Failing to mention the other exports serves his purpose. But people need to consider the entire picture, not only the partial one that’s designed to win Mr. Trump votes in the Rust Belt.

When looking at the entire picture, a couple of things jump off the canvas at me. First, there are service exports that aren’t included in the picture painted by Mr. Trump. For instance, America exports a tremendous amount of educational services to foreigners, which brings lots and lots of money into the States from those countries. I don’t have the numbers, but they’re huge. And, frankly, they’ve saved jobs at many schools, colleges, and universities, as well as at book publishing companies and other collateral industries. Education is just one example. America exports quite a few other services, too.

Second, American exports trillions and trillions of U.S. Treasury notes and bonds. In fact, China is the largest purchaser of such debt, with Japan also being a major purchaser. The fact of the matter is, someone has to buy them, and if the foreigners didn’t, we’d have to buy them domestically. And consider what that would mean:

  • fewer buyers
  • higher interest rates

In other words, we’d be paying more and having to save more, too. Savings would come out of current consumption, which means less need for products and services, which in turn means fewer jobs. And higher interest rates would mean higher mortgage expense, fewer cars purchased, etc.

It’s fair to debate trade. And to consider whether a country should protect certain industries, like America has protected farmers for decades (for some reason, Mr. Trump apparently thinks that’s “fair”). But if you’re going to debate it, then at least consider the entire picture.

The lesson here, Vera, is that you’ve got to think for yourself and not allow yourself to be spoon fed by a politician or any other person who has a vested interest in a particular position or outcome. In other words, you just can’t trust people to tell you the whole story.