It's a Social Security Scheme

Jim Rickards' s Agora Financial forwarded this Vanity Fair article and video-taped interview with Jeffery Gundlach, a Forbes 400 Wall Streeter. According to Wikipedia Gundlach was the fund manager for the TCW total return bond fund. He was fired; then, he founded Doubleline Capital. Wikipedia suggests that he has sometimes been overly bearish. In 2011 he liquidated 55% of his position in municipal bonds, but municipals did not decline.

It is easier to know what will happen than when. Rickards forwarded the piece because Gundlach is bearish on bonds--six years after his pullout from munis.  That is understandable.  I too have been  bearish, cutting back on my stock holdings in 2016 and hence getting a smaller benefit from the 2017 rally than I might have. (As well, I am a tech skeptic, which also has been a costly mistake. C'est la vie.)

The current rally will snap, either in '18 or later, and there will be a correction. There will then be monetary expansion on top of the already immense monetary expansion since 2008, and Americans will continue to suffer declines in their real wages and real household income as Wall Streeters like Gundlach benefit handsomely and those with at least some assets in the market continue to gain.

What I found most interesting about Gundlach's talk is his cavalier attitude toward screwing middle income baby boomers by instituting means testing for Social Security. He does not seem to have thought through the issue carefully, but he seems to suggest that currently benefit-eligible elderly should have their benefits cut in order to make federal government bonds more attractive to him.

Like all Wall Streeters, Gundlach has benefited handsomely from public subsidization.  No one knows how wealthy Warren Buffett or Jeff Gundlach would have been without the massive monetary expansion since 1971, but neither would be nearly as wealthy as they are.  Feeling comfortable with his own benefits from the public purse, Gundlach sees the need to cure federal indebtedness fast by reducing Social Security benefits. That way bonds will surely rally.

Gundlach is right that benefits need to be reduced. Federal indebtedness is now in excess of 100% of GDP, not including the future unfunded liabilities of the Social Security System.   According to CNBC, if actuaries use an unlimited time horizon (beyond 75 years)  rather than a 75-year horizon, the future unfunded liabilities of the system are $32 trillion.  Current GDP is $19 trillion.

Projections beyond 10 or 20 years have little meaning because the assumptions that actuaries make become increasingly inaccurate.  Technological shifts, demographic shifts, wars, diseases, impoverishment of the middle class, inflation, and monetary expansion change life expectancy.  CNBC claims  that until 2034 Social Security will be able to cover benefits. Thereafter, there will be a 25% deficit until 2090.  After that the system will be in extremis.

Gundlach suggests that boomers' benefits be cut by instituting means testing.  In other words, the middle income savers whom Gundlach's backers at the Fed have screwed by reducing interest rates should be screwed again by means testing Social Security.  Those who made life decisions based on government lies that Social Security is an insurance plan should end their lives in poverty. Gundlach is confident that boomers will not complain. He claims that they are a unique generation, but he does not offer a reason. 

Gundlach is right: Through monetary policy Wall Street has screwed boomers who save, and they have been too dumb to complain for 40 years, so Wall Street's lackeys in Congress might as well once again screw them by cutting Social Security in order to gain a few extra years' bond rally. They likely won't complain again.   Gundlach will profit. That's what the phrase "a good economy" means in today's English language.

As Gundlach suggests, the retirement age should be raised.  An increase of one year beginning with  two years from now might be a fair solution. Thus, people born in 1953 wouldn't get full benefits until 2020; people born in 1954 (my birth year) wouldn't get full benefits until 2022, and so on. The full-benefit age might be raised to 72.  That would likely solve the short-term problem. Actuaries will need to determine the precise increase in retirement age.  Fairer still would be slower increases of say six months or to start the increases five years hence so that those nearing retirement will have time to plan.

In some areas Gundlach is surprisingly uninformed.  He suggests, for instance, that air conditioning repair men, competent, technically trained blue collar workers, are now permanently unemployed. That claim reflects economic illiteracy. I have seen this strange claim repeatedly coming from elite America. It reflects the lack of competent economic instruction at elite, left-wing universities.

In any case, the employment rate in America is currently at an all-time high. Many technical jobs remain unfilled.  The employment-to-population ratio  is slightly lower than in 2008, but that is to be expected given an aging population.  The employment-to-population ratio in Nov. 2017 was 60.1; it was 63.3 in January 2007. The number of employed is at an all-time high.

The high employment rate has been achieved by reducing real wages through monetary expansion.  More Americans work; they earn lower wages.  The wealth is transferred to Wall Street because the low interest rates boost the bond market. Insiders like Gundlach and Buffett benefit most as Americans work harder for suppressed wages.

Social Security was originally sold to Americans as an insurance plan combined with a welfare plan. There is no such thing. Insurance is actuarially fair. If there is no actuarial relationship between contributions and benefits, then the plan is not insurance. Social Security was designed to give higher benefits to lower earners than they have earned and lower benefits to higher earners than they have earned.  There was never any connection between the FICA tax and the OASDI Social Security benefit.

The plan was set up to fool people. It was set up to be a fraud.  The biggest fraud was the impression given to Americans that there is a fund into which their contributions go to fund their own retirement.  That deception was accomplished by pretending that FICA was somehow separate from other federal taxes and somehow linked to OASDI. It has always been just another, albeit regressive, income tax with no connection to the statutory welfare benefit that OASDI provides.

There is no easy way out of the mess that the two parties have caused with respect to Social Security.  There are ways to reformulate monetary policy.  The two parties will not betray Wall Street, and I'm afraid Americans are unable to think without the say-so of Wall Street-backed media.  Perhaps in the future the phrase "Social Security scheme" can replace the phrase "Ponzi scheme."

The Democrats' War on Rural America

 A piece by Paul Overberg in today's  Wall Street Journal shows 20 charts that indicate how badly rural Americans have fared. The election of Donald Trump, mostly by rural voters, can be interpreted to be a reaction, and the campaign to eliminate the Electoral College a counterreaction.

Inflation-adjusted household income has declined since 2000, and it has declined the most in rural areas. Much of the  decline occurred during the Obama years. That contrasts with the stock market, which has received massive public subsidization.

Those who foot the bill for "too-big-to-fail" banks are the same people who are dying at increasing rates.

Where I live, Olive, NY, New York City has long played an imperialistic role similar to that of any Roman-style power. It has done so to procure virtually free water; it chose to go the imperial route rather than purchase water ethically back in the 19th century.

In his book Empire of Water, David Soll outlines the 100-year history of theft, exploitation, and regulatory caprice that deprived the ancestors of many people I see each day of their homes and businesses, forcing many who had owned family businesses into becoming day laborers.

Environmentalists, dominant in the Democratic Party,  have learned from New York City and since the 1990s have systematically attacked rural areas. This occurred most aggressively during the Obama years.

Not satisfied with increasing death rates in rural areas,  Robert Reich, the American media, and their fellow Democrats campaign for more political power to be concentrated in urban centers by abolishing the Electoral College.

The Banking Interests Behind the New Deal

In 2014 Nomi Prins wrote this piece in Fortune about the bankers behind the New Deal.  The New Deal was a banking revolution. The social aspects, cherished by the Democratic Party, were window dressing. Franklin Roosevelt had been a Wall Street fund manager, and he gave the American monetary system to Wall Street. That was the main point of the New Deal. 

Prins's story leads to Winthrop Aldrich, uncle of Nelson Aldrich Rockefeller and David Rockefeller.

Aldrich's father, Senator Nelson W. Aldrich, was the architect of the Federal Reserve Bank.

Incidentally, Bush's great grandfather, Samuel P. Bush, had served on the first board of the Cleveland Federal Reserve Bank. Samuel had been the president of Frank Rockefeller, John D. Rockefeller's brother's, company, Buckeye Steel.

FDR's great great grandfather, Isaac Roosevelt, had been Alexander Hamilton's partner in founding the Bank of New York, now part of Mellon. There's documentation, including a court case, that a bank for which Prescott Bush, Bush's grandfather, served on the board had helped fund Hitler.

Franklin Delano Roosevelt's uncle, Frederic A. Delano, was a Hong Kong-based railroad tycoon who served as the first vice chairman of the Federal Reserve Bank in Washington in 1914.

FDR represented the open control of America by elite financial interests that his cousin, Theodore Roosevelt, had put into play. Wilson signed the Federal Reserve Act, but Wilson would not have been elected if TR had not run as a third party candidate. The funder of his party, the Progressive or Bull Moose Party, was George Perkins, a close assistant to JP Morgan and former president of International Harvester.

Frank Vanderlip, who was present at the famous Fed-planning session at Jeckyll Island in 1910, was also a personal friend of Woodrow Wilson because of their work on shaping the modern American university system. Wilson, who had met JP Morgan because Morgan was a donor to Princeton, dropped Vanderlip as a friend and associate at the point at which Wilson entered the 1912 race. Vanderlip talks about that in his letters. No one knows the reason for sure, but it seems obvious.

Long Live the Electoral College

I favor the Electoral College. Direct democracy was a failure in Athens; it is a failure in the US. The American people are easily manipulated by special interests and hardcore, tyrannical socialists like Bernie Sanders.

American politics has become a debate between two self-interested, elite interest groups: the Democratic Party, including academics, professional interests like psychologists, schoolteachers, and lawyers, and some investment banks; and the Republican Party, including economic special interests like pharmaceutical companies, natural resource interests, agribusiness, and some investment banks.

Direct democracy represents one or the other of the corrupt special interest constellations, so it has failed. Big government is incompatible with direct democracy. The delusion of direct democracy is one of the principle methods that the Democrats use to manipulate the public into imagining that the Democrats' corrupt special interests somehow represent the public,

The public has done much worse since the establishment of the current presidential primary system and the ending of the republican principle by the 16th, 17th, and 18th Amendments.

The founders saw the need for a republican form of government, one that combines majority and aristocratic rule. Overt aristocratic rule by the Senate led to the best American statesmanship, a point that De Tocqueville explicitly observes in Democracy in America.

American workers fared much better before the Progressive era than they do today. There was more freedom; wages increased every year; savings rates were at 30%. The use of eminent domain to steal private property was comparatively rare. There was more income equality (less income inequality) under the republican system than under the Progressive and post-New Deal systems.

One of the safeguards the founders put in place was to limit the power of urban areas. Urban areas are prone to totalitarian, extremist impulses, and we witness that today with Mayor de Blasio's Red Guard-like lynching of history and his eagerness to smash statutes of Christopher Columbus and Theodore Roosevelt.

The states signed on to a Constitution (a) that was limited to delegated powers and (b) that weighted voting power to limit the authority of the totalitarian-tending masses in urban areas. One of the ways it did this was the Electoral College.

The principle of delegated powers was overthrown by authoritarian, urban elites (in the person of Hamilton and the party of the Federalists) almost as soon as the Constitution was passed; the principle in the Declaration that government exists by the consent of the governed was overturned in the Civil War; the republican principle was overturned by the Progressives in the 16th, 17th, 18th Amendments. All of these centralizing policies were mistakes, but only the 18th Amendment, Prohibition, was repealed.

The people of rural America would be fools to favor ending the Electoral College.