Lax risk management, an incurious Federal Reserve, credit rating agency shopping, greed and garden-variety stupidity. Welcome to what could be the next great financial crisis.
I keep waiting for the bottom to fall out and am reminded of J.K. Galbraith:
"Only in the financial world is there such an efficient design for concealing what, with the passage of time, will be revealed as self- and general delusion."
"In a speculative boom, the tide of money covers a multitude of sins. When the tide goes out, the sins are there for all to see."
I was too young to have observed how the massive inflation of the 1970s started, but I wonder if the only choice now is between severe inflation and severe economic contraction. I'm convinced it's one or the other. Adding to all the peril you wrote about are things like cryptocurrency -- a damn shady sector.
"the only choice now is between severe inflation and severe economic contraction. I'm convinced it's one or the other"
Agreed. The retirement cohorts need to brace themselves to see their pensions go poof 90's-Russia style. Of course, they'll be blamed for their own demise, in the idiotic fights whipped up between the so-called "generations".
Unless the whole world goes down the drain (in which case it doesn't matter what you do), the financial security of many Canadian retirees like me—relying, as mine does, on dividends from heavily regulated Canadian banks and the stability of southern Ontario real estate (probably the two safest investments on the planet)—is essentially beyond threatening. I also have a lifetime pension indexed to inflation as a safety net; but it's the dividends that confer complete spending freedom without having to agonize over price hikes.
Well good on you. No need to think about the rest of us then. I'll admit to not being terribly economically literate but I'm struggling to understand what the point of your comment is?
As with all bromides, the advice yours offers shouldn't be followed too categorically. The reasons why Canadian banks and real estate are sound investments in world context have been persuasive for decades, and explain why RBC and BMO stocks cost over a hundred dollars per share, and why the population of the greater Toronto area continues to grow exponentially while that of many major American cities is declining.
The dual point is that analysis which may make sense in an American context doesn't necessarily tell you much about the rest of the world, and that categorical claims like “retirement cohorts need to brace themselves” are risky, since financial and other sorts of security vary according to personal circumstances, whatever cohort one belongs to.
As for thinking of others, I support many charitable causes, and both my daughters and their families are in houses of their own because of my financial aid. How about you? There's an unattractive air of resentment in your comment; aren't you pleased to hear that at least some retirees are doing okay? Isn't this what you'd want for them, and isn't it good news that financial security is still a realistic goal, for them and for you?
I'm thrilled you support charitable causes and your kids have homes because of your financial largesse- here's a ribbon. I'm a retiree and I get by, but I'm not worried about myself or retirees in general- I'm worried about the rest of the population. We're not supposed to sacrifice the young to keep ourselves cushioned and I'm so disgusted to see that attitude so pervasive in Canada. The Boomers and the elbows up attitude disgust me. So no it's not resentment it's disgust. The cost of your cushion has been passed off in deficit after deficit to future generations. You may have worked hard for what you have but you got lucky when much of it's value ballooned (real estate). You got to buy a house and you'll get to collect your pension so don't you worry your little head that the pension fund will be empty the next generations go to collect.
What gratuitously mean-spirited comments, from someone who self-presents as a mean-spirited person. How do you know what my concerns and worries are, and on whose behalf? How do you know I don't feel as keen a sense of responsibility for the population at large, and for the young in particular, as you do? Do you really think such things are deducible from somebody's financial circumstances? That's not only unjust, it's simple-minded.
It's clear you're resentful all right, and irrationally so, if you resent 'luck,' something over which none of us has any control. As Simone de Beauvoir put it, “Some people labour all their lives just to reach that platform from which their luckier fellows are already departing.” That's the way the world has always been, and whether one is on the platform or making one's way toward it, all we can do is make the most of the opportunities available to us. I presume that's what you've done too; you're a fool if you haven't. Yes, my wife and I worked hard, and were also lucky; on the way through our joint life project, neither of us ever envied those who have more than we do, or felt guilty that others have less: everyone is situated somewhere on that continuum, with plenty of people both above and below them.
That includes you; so if you resent people who have more, you should logically be apologizing to the very sizable proportion of the world's population that's had fewer opportunities and been less lucky than you. In my view both sentiments are irrational, but at least you'd be logically consistent, and less hypocritical.
As for our “cushion,” our children and grandchildren—decades younger than you are—will inherit almost all of it. My wife and I don't have an extravagant lifestyle: the investments that generate the dividends that pay our property tax will pass to future generations intact. You'll have to forgive us that the alternative of instead turning the rewards of our labour over to people with an unattractive inter-generational prejudice (or any other kind of group prejudice) was never part of the plan.
He’s delusional. The world doesn’t need to go down the drain to put his precious “heavily regulated” bank and pension at risk. Just Canada needs to collapse, and Mark Carney is furiously working on stripping Canada of its wealth and shipping it to his masters in the City of London.
So, in Canada you really have nothing to fear from inflation? From servicing your govt debt which is greater than GDP? without reserve currency status? And your gov doesn't play games with inflation measurements? And no unrest will emerge from the less prepared if things in the West generally go south? I could go on, but my point is, regarding reliability, "past performance is not indicative of future results", especially as more than a few storms have been brewing on the world macro scale. Yes, it is highly possible "the whole [Western] world goes down the drain".
(?) When you have a polemical temperament, but no relevant rebuttal to what's actually been said, just create a straw man who's unconcerned about inflation or government debt, and attack this target instead. Justin Trudeau specialized in such evasion—he continually made points no one was contesting, as an alternative to relevantly addressing questions and issues—and apparently you're a disciple who's internalized the technique. Never mind that it commits a logical fallacy, annoying because of its transparency and the contempt it thereby shows for anyone whose supposed views it caricatures; do you truly imagine it's any more persuasive coming from you than him?
I realize a whole lot of pins were dinged here in your pinball mind (that's not an insult, closer to a compliment), but, for our audience as much as me, let's take it a step at a time so we all know where the ball is...
"Unless the whole world goes down the drain (in which case it doesn't matter what you do) ..."
It certainly would matter, if the sufficiently able would find new ways of organizing. As technology -- which includes all sciences, which includes psychology, which includes propaganda -- always improves, so can the technology of organization. Bottom line: No, it's NOT impossible to 'change the world'.
<soapbox> IMO, the first thing is to focus on things that matter. The last two centuries' histories demonstrate these are not, say, capitalism vs socialism, nor democracy vs dictatorship, but rather, intelligent psychopathy vs social normal people. The last one we barely know how to recognize, let alone contain, and where necessary, control. But it's one of the true problems. </soapbox>
" ... the financial security of many Canadian retirees like me ..."
My list was yanked off the top of my head, in turn from ideas that made sense and that I pulled, over time, from alt sites. This is an alt site. I'm never married to any idea. Are you here to troll alt sites, or provide such compelling arguments that they change minds? From the other comments, it seems your effect clearly reflects the former. First as a braggart, second as a rabbit hole into your mind.
" ... —relying, as mine does, on dividends from heavily regulated Canadian banks and the stability of southern Ontario real estate (probably the two safest investments on the planet)—is essentially beyond threatening. I also have a lifetime pension indexed to inflation as a safety net; but it's the dividends that confer complete spending freedom without having to agonize over price hikes."
Goody for you. Are you saying the rest of us can do all this too, or are you grandfathered into now-matured and/or closed systems, and are just taunting us? Could you be a pal, and point us all to some help on this? Thanks in advance.
--------------------
"(?) When you have a polemical temperament, but no relevant rebuttal to what's actually been said..."
That's why I'm hammering it out point by point, cuz I got lots of time to read, to (try!) to think, and to vent, you see ...
" ... just create a straw man who's unconcerned about inflation or government debt ..."
... as I am relying retired fully on a modest US gov pension, and I am quite sober about the potential need to off myself at some point in the not-too-distant future. As I said, like a pensioner in 90s Russia, it's coming to an gov-asserted "democracy" near you.
"Justin Trudeau specialized in such evasion— he continually made points no one was contesting, as an alternative to relevantly addressing questions and issues—and apparently you're a disciple who's internalized the technique." ..."
I see it this way: At the beginning of this thread, you were contesting the idea that your situation is safe. I raised (rather innocent, actually, though in some ways 'alt',) questions about that. I believe you, sir, are the one who didn't actually address them. Because I'm perfectly fine with you providing an *actual* withering criticism of my questioning debt/GDP ratios, the possibility of dangerously increasing inflation, etc., I can learn something.
" ... Never mind that it commits a logical fallacy ..."
Spell it out, then, for us idiots, shaming me and convincing the audience.
"... annoying because of its transparency and the contempt it thereby shows for anyone whose supposed views it caricatures; do you truly imagine it's any more persuasive coming from you than him?"
Great minds think differently, Mark. That's what makes them great. Please show us how great yours is by unpeeling the rhetorical onion you gave me just above. to show those arguments. Please. As you are pointing out, I'm an idiot and probably an asshole, so it shouldn't really be too hard.
I must be in a mellow mood today. I didn't take his comments as bragging. Just telling how he feels about his own future. I happen to agree with your version of how things will probably turn out.But he may have other resources he didn't mention..
Wow Anti-hip, I think I love you😉. You are far more informed, eloquent and patient than I am and while I'm a little invested so not entirely impartial this is the most brilliant ebuttal comment I've ever seen. And so nice about it, I'm going to frame it!
OMG... straw manning is evidently an addiction. A simple acknowledgment that one's investment strategies, however prudent, aren't immune to general financial and civilization collapse doesn't qualify as a claim that it's impossible to change the world. Life has been changing the world since the first pond scum.
“The last two centuries' histories demonstrate... [etc.] ...I'm never married to any idea.”
Talk about irrelevant side-excursions; if you ever had a sense of logical relevance, it seems to have deserted you here.
“Are you here to troll alt sites, or provide such compelling arguments that they change minds?”
In a general way I'm perusing a news site to which I subscribe. In this specific instance I'm responding to a categorical claim about retirees by citing the experience of a retiree I'm in a position to know something about—myself.
“Are you saying the rest of us can do all this too...”
Why not? I never had money in my pocket when young, and didn't work in high finance; my earnings were adequate but modest. There's nothing preventing you from opening an investment account, or from investing in yourself by getting an education, which you can do at the public library for free. The major rewards from investing come at the end, after a lifetime of disciplined saving; and the extent of your diligence is something you control. No one else is responsible for it.
“Because I'm perfectly fine with you providing an *actual* withering criticism of my questioning debt/GDP ratios, the possibility of dangerously increasing inflation, etc.”
You're free to embark on whichever side-excursions tempt you. If you haven't yet figured out that any expectation I would join you in such journeys is fanciful, I'm sure you'll get it eventually.
“Spell it out, then...
“The fallacy of an "irrelevant reply" refers to several related logical fallacies where an argument's conclusion or response fails to address the actual issue at hand. The most common and formal name for this is Ignoratio Elenchi (Irrelevant Conclusion).
Key characteristics
The core of this fallacy is that a person "misses the point" of the debate. The argument they present may even be logical and valid in itself, but it does not address the original topic of discussion.
The fallacy involves one of the following:
Answering a different question than the one that was asked.
Proving a different, but often related, conclusion than the one that is at issue.
Related fallacies
While ignoratio elenchi is the broadest category, the "irrelevant reply" can manifest in several more specific ways, which are often classified as sub-types.
Red Herring
A red herring is a deliberate attempt to divert an inquiry by changing the subject to a new, often emotionally charged, and irrelevant topic.
Example: When asked about a financial scandal, a politician replies, "I think we should focus on the real issue: the high taxes killing our small businesses".
Straw Man
This fallacy involves misrepresenting or oversimplifying an opponent's argument to make it easier to attack. The irrelevant reply is an attack on the fabricated argument, not the actual one.
Example: One person argues for increasing funding for environmental programs. The opponent responds by saying, "My opponent thinks we should pour money into saving the planet while the working class suffers".
Non sequitur
Literally Latin for "it does not follow," a non sequitur is a broad term for a conclusion that has no logical connection to its preceding premises. It's the most general version of an irrelevant argument.
Example: "Our company is in a budget crisis, so we need to make the academic requirements stricter for students".
How to identify an irrelevant reply
To spot this fallacy, you can ask yourself a few questions:
Does the reply logically support the original claim? Look for a gap between the premises and the conclusion.
Is the arguer addressing a different topic? Distinguish between arguments that attack the original point and those that simply pivot to a new, unrelated issue.
Is the arguer proving a point that no one was disputing? The "irrelevant reply" often makes a solid case for a proposition that is not actually at issue.”
# # #
“A straw man argument is a logical fallacy where someone misrepresents or distorts an opponent's argument to make it easier to attack. Instead of addressing the actual argument, they create a weaker, "straw man" version of it and then argue against that distorted position. For example, if someone suggests the school needs more math classes, a straw man response might be, "So you think we should just ignore reading and writing?".
Misrepresentation: The core of the fallacy is changing the opponent's position into an exaggerated or extreme one that they never actually made.
Easier target: This distorted argument is then attacked, which falsely appears to be a refutation of the original, stronger argument.
Purpose: It is a rhetorical tactic used to make one's own argument seem superior by defeating an easy-to-demolish caricature of the opposition.
Example: A person might say, "I prefer a dog over a cat," and a straw man response would be, "Why do you hate cats so much?". The second person has misrepresented the first person's statement as an attack on cats, rather than a simple preference for dogs.”
# # #
You could have discovered the above for yourself simply by entering the phrases “irrelevant reply” and “straw man argument” in Google. If you're interested in more extended discussion, though, I recommend Irving M. Copi's Introduction to Logic. Most people have never opened a book of logic in their lives and wouldn't know Modus Ponens from Modus Tollens, or any other rule of inference; but you don't have to be one of them. An ancillary benefit of making the investment could be an increased capacity for producing posts of greater interest and relevance.
P.S. You probably will succeed in getting someone to waltz with you here. Evasion artists are adept at using sarcasm and other psychological prods (not excluding lies: “As you are pointing out [?], I'm an idiot and probably an asshole”) to lure people into arguing over long lists of contentious matters having no relevance for the original issue. The sensible response to irrelevance, in my view, is to ignore it.
No government plan is ever safe in an absolute sense. Governments get out of liabilities by printing money (inflation). Most government plans in the anglosphere are technically insolvent in real economic terms. That is, valued at truly economic rates of return for liabilities which are supposed to be certain to be paid, most government plans have less assets than liabilities. The Canada Pension Plan discounts liabilities at 5.79% according to the 31st Actuarial Report. But the 5 year rate on Canada Treasuries is 2.75% same as the long rate. The ten year is a bit higher at 3.25. By grossly overstating the risk free rate of return, they are grossly understating the actual liabilities of the system. Everybody does this. If an insurance company was asked to purchase a portfolio that exactly matched the liabilities, to "defease" the liability, they would buy Canadian treasury bonds whose cash flows exactly matched the cash flows expected to be paid out. the rates of return at which that would happen are 2.75% not 5.79%. The first order calculation for how much the liabilities are undervalued would be: ΔV/V = -D(Δy), where V is the value of the pension, D is the duration of the liability (a measure of the center of gravity of the cash flows in time), y is the yield or discount rate and Δ is the change operator. Retired lives often have a duration of 12. So the first order measure of the drop in value would be approximately -12x3% =-36%. Namely as a first guess, if total assets equalled actuarial liabilities, the CPP would be underfunded by 36% on a real economic basis. The state of California, counting all municipal, local and state plans is over 70% underfunded. Ain't nobody "safe" anywhere. BTW, this issue about the discount rates is a scandal within the actuarial community with the more economically savvy actuaries arguing the discount rates are too high and the old line entrenching knowing how bad this will make them look. The clue to understanding which side is right is to ask what a disinterested observer would do if asked to "takeover" the pension plan and "make sure" all the benefits were paid. Why they would buy Treasury bonds to match the payouts because Treasury bonds are certain to be paid. The rate on those is 2.75% not 5.75%!
(?) That there's no absolute safety we knew before you saw fit to inform us at length. Since a standard of performance no individual or institution can ever meet isn't in any real sense a standard at all, talk of 'absolutes' is an irrelevant side excursion that evades the real question of relevant risk. In this connection, if governments and banks go, you go. Meantime, they're relatively sensible investment vehicles.
As for real estate, only a small fraction of the world's population has ever owned property. It was said a long time ago, but it's still good advice: "Buy land! They've stopped making it!"
If banks go, you don't have to go. And you don't have to go even if gov'ts go. All depends on how and where your wealth is held. Even though CPP is inflation indexed, because they are really underfunded in economic terms, there will be a reckoning. When that comes, breaking inflation indexing will be one of the items on the table right alongside means testing for pension benefits. In short, the social contract you thought you had is going right out the window. It's not malicious, it's just math. But, if a very liberal government is in power, the pension plan is going to be likely used to redistribute wealth and income. If a conservative government, maybe not so much. But it's still a math problem and there's only so many places from which to grab assets to pay for the promises.
When credit freezes up the value of real estate crashes and crashes hard. If you have it financed your in trouble if it’s debt free you will be able to hold it but if forced to sell to raise cash you will be screwed
1) massive currency devaluation after Bretton Woods and abandonment of gold standard
2)Followed by supply shock (oil embargo
3) followed by repeated policy errors from Fed chiefs under Nixon, Ford and Carter
Carter did eventually appoint Volcker, but his first Fed chair appointment was G. William Miller, who served for 1.5 years and was a disaster.
“As chairman at the Board of Governors, Miller became known for his expansionary monetary policies. Unlike some of his predecessors, Miller was less focused on combating inflation, but rather was intent on promoting economic growth even if it resulted in inflation. Miller argued that the Federal Reserve should take measures to encourage investment instead of fight rising prices. He believed that inflation was caused by many factors beyond the Board's control.”
A little unknown history. Paul Volker was the person who talked Nixon’s treasury secretary to abandon the gold standard. In other words Volker set your house of fire. Then when he was Fed chair he shows up with the fire hose and is claimed a hero by massively raising interest rates. Volker was no hero he was an arsonist ever single one of the people like Volkers are too smart for our own good.
Though lots of people were advising going off the gold standard at that time. It had become untenable after the war spending of LBJ and Nixon (and the economic and competitive recovery of Europe in the 1960s).
The choice was between starting a depression or sustained contraction and deflation in the US to maintain the currency link to gold, or to switch to floating exchange rates, and there weren’t too many pols arguing for the economic contraction route (save the Goldwater wing). Political suicide.
Much easier to let purchasing power degrade continually over decades!
I concur that policy makers have to choose between those two unpleasant options, but this unavoidable outcome is the entire argument against intervening in the free market. We can only blame ourselves and try to delay the inevitable.
Without going into this too specifically I will say that those of us in the industry have been pointing out the insane amount of debt PC companies have had to raise with capital inflows. Just look at the “investment grade bonds” with the highest yields on offer right now - top of the list are all private credit. When you borrow to lever there is NO room for negative outcomes…. Negative outcomes ALWAYS happen at some point in the cycle and then poof.
I am a great Taibbi fan but this article is mostly meaningless to me due to the use of jargon in it. Imagine trying to teach chemistry to a two year old using terms like orbitals, quarks, and Avogadro’s number (6.02 x 10^23). I’m not blaming you for being smart. I just want you to remember your audience—I am paying you to explain important news to me, but I’m really stupid about financial stuff. I want to understand what you’re saying. So, please use small words like “big fat liars,” “stealing money,” “hard working people,” “lazy watch dogs.” I expect that I’ll be shamed for being dumb, but I thought you might want to know. Thanks for noticing me.
Banks have loaned money to companies which carry too much debt to survive a recession. So if there’s a big downturn, banks are going to go to Congress for cash, again. They know they’re doing it. The Fed knows they’re doing it. It is starting to fall apart and they don’t care. /end summary
Anyone writing, “ orbitals, quarks, and Avogadro’s number (6.02 x 10^23)” cannot be “dumb”.
Like the learning of any language, start by acquiring a basic vocabulary. Start with this article. Google every mysterious term. Or find a primer and devote ten minutes a week to reading it. Read a couple Michael Lewis exposes’. A year from now, you’ll be awesome.
Oh, and by the way, your terms, “big fat liars,” “stealing money,” “hard working people,” “lazy watch dogs, are quite accurate.
And don’t forget “chumps in chains” cuz that’s most of us who contribute to 401K’s.
I'm with you. Check out Edward Seidel (spelling might not be correct). His Substack is specifically about pensions, state pensions mostly. It does not look good!
I don’t know Seidel, but many state pensions are significantly underfunded, are increasingly investing in riskier assets and use rosy assumptions that a private company could never use. The state’s taxpayers will be on the hook.
They are allowed to remain underfunded at a level that is not allowed with a corporate pension. This should not be the case, especially since the taxpayers end up being responsible for this underfunding.
This is partly because they are allowed to use aggressive rate of return assumptions in calculating their annual required pension contributions. Again, they use ror assumptions that a private pension could not get away with.
Once again, your government at work. For themselves.
Same here. I have several degrees in science, but finance is way too complicated for me to consider getting a PhD equivalent just to read the financial news. Truly, it's about the jargon.
Yes the jargon of all professionals is meant to confuse. The convoluted lending schemes are just meant to cover their tracks. In the end you are either getting ahead or falling behind. Math (arithmetic actually) is pretty simple. Just like our personal finance with a lot of zeros added.
Hey, don't sell yourself short. I think you understood more than you think as evidenced by your "small words" translation. But I'm with you. I had to reread so many sentences to try to get the gist that it probably took twice as long as it should have to read the article. This sentence never did make sense: "and as we know, PE funds a percentage of each purchase with debt raised through bank funding." I was okay up to "raised" where I surmised PE funds use borrowed money to do a portion of their financing 🥴, but I have no clue what "through bank funding" means. Are they borrowing borrowed money to lend to more borrowers? Their hands are moving so rapidly through so many pockets that no one is getting any benefit from being jerked off! (Sorry for the crude analogy, but that's my interpretation.)
Private equity buys a business or company, part with their own capital and part with loans from a bank. This is called a leveraged buyout. The new private equity owners put the debt they borrowed to buy the company on that company's books.
More voo-doo economics. I don’t pretend to really understand everything going on. But my bullshit meter is pegging out. Or maybe I am just too old to understand “modern” economics.
As long as there are no taxpayer-funded bailouts, it's simple caveat emptor. Once the government bailouts arrive, then we're all invested in private credit (Rich Helppie's warnings notwithstanding).
And who elects congressmen? Who could be on the phones to, contacting media daily about their elected REPRESENTATIVES? Who should be a little more informed, a little more involved? Where flew PERSONAL RESPONSIBILITY?
That's right, blame the people for everything. Congress is not to blame. They are supposed to know how to walk, talk, and chew gum. Congress gets called and written everyday, but all that ever gets done is what they need to do to keep their power with all the wealth and privilege that comes with it. The lying Pravda "media" that we have is the propaganda arm for Congress, and is a complete joke and a waste of time. Go ahead, make the people the SCAPEGOAT FOR CONGRESS if you will. NOT ME.
Well yes, Congress. Beside you, me, the media (a BIG bad) and the rest of us. When Congress doesn't act, it's up to us to set them straight. I don't feel like I do enough - but I do more than those I know who do nothing. Our representatives need to hear more from us than from lobbyists. And there are way more of us - and way more of our votes that put them there.
Though concerned a little by the banks’ lending to them, let’s not forget that the Fed has provided them a LOT of liquidity by paying them interest on their overnight funds - a historical anomaly - while printing money like crazy during QE2 and Covid, and should be able to sustain some losses better than 2008. And that was an issue more with trading firms than banks. My bigger concern is the insurance companies. If they are placing a significant portion of their capital into these funds, the risk of losses is enormous and can remain well-hidden until a collapse. And sorry, insurance examiners are even weaker than bank examiners when analyzing risks.
I can make this relatively simple, not that anyone in charge cares, because they make out great from The Grift(tm). But for the rest of us---
John Maynard Keynes was a very smart economist. He did not get everything right in his "General Theory...", but his mistakes were more on the political side than on the economics. More specifically, he argued that the roughest edges of an economic downturn could be ameliortaed by a mix of government fiscal and monetary policies, in the case of massive deflation, by pumping more money into the economy through government deficits and supportive central bank policies to let those deficits translate into more money in circulation. Conversely, when the economy is runnning "hot," the government should run surpluses, abetted by the central bank, to soak up excess money and avoid inflating the currency. (Parenthetically, common usage gets it mostly wrong, confusing price increases with "inflation." Inflation means increasing teh amount of money in the economy, which will usually lead to increased prices if carried on too far or too long... but prices of particular things can rise for other reasons, too, such as the supply chain problems during the worst of the COVID shutdowns. Or the current talk about tariffs. Tariffs can and will cause the prices of some things to increase, but will not in itself trigger a general inflation of the money supply that would justify the Fed keeping credit tight.)
Keynes never promised that the economy could be managed smoothly, forever, and no more business cycles. He argued only that in a case of extreme deflation (the Great Depression), government could and should take actions to counter that deflation so the economy could get back on its feet. And, once that happened, the government could reel all that back in, and while things should be balanced over the long run, adjustments could be made from time to time to smooth out the wildest swings.
Some decades ago, it became obvious that the government would not take fiscal actions to rein in inflation, because such actions (budget cuts and tax increases) are unpopular in the short term. So, we threw out at least half of the tools to implement Keynes' theory, and are left with only monetary policy, which is a VERY blunt instrument. So, when inflation begins to heat up, we tighten the money supply and make credit more difficult--essentially, strangle the whole economy. And when deflation threatens, we pump money and ease credit to grow the money supply. We overheat the whole economy rather than address the specific industries or areas that are problems. Those are the only tools we use. And we are very reluctant to do the tightening bit, because, like fiscal belt tightening (budget cuts and tax increases), it, too, is unpopular, and the asset markets, esp. stocks and bonds and related options markets, respond negatively. So, teh pattern has been that when it comes time to tighten the money supply and credit (raise the discount rate and buy in more securities) the Fed waits too long and then tries to compensate by doing too much. Boom and bust cycles being exaggerated by teh confluence of political and Fed incentives.
So, for decades we have been in a long-term ratchet where we increase liquidity whenever problems seem likely to arise, but when prospects look better we never tighten enough to "soak up" all that money and credit we just created. That is why price increases are perennial, and the Fed has given up on its mandate for a stable currency, redefining 2% annual "infation" (really, 2% annual overall price increases) as its goal. Which is ridiculous under any rational system, at 2% prices double every generation, but given all the above, is the best they can hope for.
The point of all this being that all that created money and credit has to go somewhere, in search of yield (investment returns). And, there are only so many good ideas and companies and assets out there, and not enough to satisfy the artificially enlarged demand for investment returns.
So, you get money chasing weak investments--really, speculations-- and in that environment, people will commit all sorts of imprudent and even fraudulent acts to get at that money. So, a market break and financial crisis every 10-20 years, as asset prices get bid out of line with what they can return, and then the crash when the Fed belatedly hits the brakes (for fear of inflationary price increases) and everyone realizes that at current asset prices, they will not get the return on investment that they planned on, so they take their losses and write downthe value of those assets, which cripples asset-colateralized lending and shrinksthe economy..
So, fraud is built into the system, as excess money looks for returns, and imprudent people and fraudsters pretend to offer for sale assets to meet all that demand. And the "investors" look teh other way because what choice do they have? The money has to be invested somewhere!
QED. As Charlie Munger said, "Show me the incentives and I will show you the outcome." The incentives lead to asset prices being unsustainably high due to unreasonable optimism and large doses of fraud, and the outcome is a cycle of "hot" markets followed by bankruptcies and market crashes when the optimism and fraud is revealed.
In a recent interview, Joe Manchin recommended term limits for Congress. This is the only way that budget cuts (and less likely tax cuts) can get done.
There are constitutional questions, but if they can be got around, there remains the question of who really controls spending and tax bills: the elected members, the semi-permanent committee staffs, or the lobbyists. Term limits only can work if the elected members really control things at a granular level. Otherwise, term limits mostly make it very difficult and unlikely that any Member, let alone a working majority in both Houses, will gain the detailed knowledge and independence to act contrary to the wishes of the staff and lobbyists.
I respect Manchin's and Paul's (and several others') experience and arguments, but color me skeptical. I tend to think that after almost 100 years of the New Deal, the Fair Deal, the New Fronteir, and especially the Great Society, the public has been trained to believe that government not only can but should solve all its problems. As Zohran Momdani recently said in his victory speech in NYC, "no problem too large, no problem too small." For decades, there has been a word for most politicians who say that there will be some pain or discomfort on the way to a better future: "Losers." For every Thomas Massie, there are many, many nemes of forgotten losers.
The late Dick Cheney caught the essence of this decades ago, when he said that "Deficits don't matter." He was not talking about economics, he was talking about politics, and that nobody loses an election by spending a little more, or wins by advocating belt-tightening. Trump gets this, which is why he opposes entitlement cuts, esp to Social Security, when traditional Republicans argue for them. There is a reason why "Social Security reform" has been called "the third rail of American politics--touch it and you die" for many decades. And with the big entitlement programs (Social, Medicare, Medicaid) now far larger than either Defense or non-Defense discretionary, any macro-economically effective budget restraint has to include the very entitlements that the public will not allow.
Nothing lasts forever, but I suspect it will take a radical political and cultural break to get the country to again accept the reality that there are always trade-offs and sometimes one has to sacrifice in the present in order to invest in the future. Especially with all out politicians and media telling people that there really is a free lunch. Maybe Neil Howe's predicted Fourth Turning...? Or economic/financial defeat that displaces the US dollar from its pre-eminence, thus forcing the US to put its house in order in order to get the foreign exchange to trade with the world...?
You make excellent points. Jesse Ventura stated that it took about 3 months to get up to speed as a governor. Our typical Senator or Representative focuses on reelection, not legislating, the day after the election. Another alternative is deregulation. Increasing production can increase tax revenues to counteract increasing budget deficits if spending on nondescetionary items can be held in check.
I tend to agree with you that getting government out of so many things is a necessary (but not sufficient) condition for improvement. Our system was designed for 13 recently separate colonies that still did not trust each other, thinly populated, primarily agricultural and a bit mercantile (but hardly at all industrial), jealous of their rights and privileges and suspicious of a government's ability and interest to take power unto itself. At this point, the original idea of limited, enuerated powers has all but disappeared and exists only on the thinnest margins. It didn't fail for lack of success, it failed for inability to defend itself under changing conditions.
Some people, starting with the Progressives of the period around the turn of the 20th Century, argued that we needed a more powerful central government to meet the challenges, and that by constituting that government with experts (Platonic philosopher kings, in bureaucratic guise) we could avoid the tendency of politicians to aggrandize power and wealth. In teh ensuing 140 or so years, we saw Progressives and others of similar mind take over the government, and conclusively prove that government by experts is no solution at all, if desires enhanced freedom and liberty.
That seems to leave the only option on the table to be shrinking government from day-to-day control of our lives, and taking only the roles it was originally intended--- foreign affairs, defense, regulating internal commerce between the states, and assuring basic liberties to the people. Add a few other things, where state-by-state regulations and programs would be chaotic and create bad incentives, but otherwise, assure personal and property rights and uniform justice, and then get out of the way.
But, has there ever been a government, and governing class that willingly give up that much power? So, back to thoughts of a Fourth Turning...
As Thomas Sowell is famous for saying, “There are no solutions, only trade-offs.” You make a good point on term limits. The trade-off is the size of the war chest of incumbents and your points on established committees. I personally am willing to take the chance. Term limits appear to be effective at the State level. When Paul Ryan was ridiculed by the 'pushing Granny off the cliff' ad, I knew there was no hope for the people even to attempt to understand the seriousness of our economic situation. Party like it's 1999 until it isn't seems to be our course.
Things are complicated, but no sane observer can doubt your last point, as we go giggling toward the cliff's edge.
But I will note that the "pushing Granny off the cliff ad" likely had some Big Pharma money behind it, not merely Democratic politicians. Somebody bankrolls these things, hence, government by lobbyists.
Pedants will insist we are a representative democratic republic, but imho we are fast becoming an oligarchic kakistocracy. I see Trump and MAGA as a cri de couer against that, but looking at how MAGA is currently devouring itself, the smart money may still be on the kakistocracy.
You're welcome. btw, Salzman did not get anything wrong, he accurately describes the state of things in 2025. I am just trying to give the bigger picture on why this kind of thing keeps happening every few years.
“You’re not paid to do due diligence in this market.”
Oh wait, same phrase true for institutional doctors in the Covid era.(instead rational analysis was punished re masking, social distancing, lockdowns, early treatment, vaxxing a rapidly mutating respiratory virus with a non-immunizing vaccine, mandates, etc).
You’re right and the ruse of covid was used to create the inflation (rise in money supply). Articles like this are about symptoms brought on by the disease rather than an actual cure. Not to say it’s not a good article, it is for sure.
It’s all bubbles these days. It’s not just the financial system. The education system, the medical system, the electrical grid; you name it. All teetering on the edge. Even the military is a bubble: we don’t have enough missiles, our tanks are about 50 years old, and just look at the B-52…first flown in 1952!
The only question now is which bubble is going to start all the others popping.
The dollar is the ultimate bubble which in turn creates the everything bubble you refer to.
Some people say that culture precedes politics. I would say economics precedes culture; i.e. a bubble economy produces bubble economy people….or something like that.
One quibble- you are conflating S&P global’s middle market credit universe (which by definition are big enough credit users to merit the attention of S&P credit analysts, with the entire middle market company space.
It’s line asking a bar owner to opine on the drinking habits of the average American. They can only talk about the average bar drinker. They can’t tell us if the bar drinker is representative of the average American.
The quip about not being paid for diligence is scary, and it reflects oversupply of credit. Excess liquidity creates sloppiness.
Back in 2007 it seemed credit card loans were good risks because borrowers paid them off, but the reason they were able to pay them off was that someone else gave them a new card and incented them to move balances. Plentiful liquidity can impersonate solvency….until new liquidity stops and we see who can actually generate cash flow to pay off existing debts rather than relying on new debt to pay off old debt.
"The game plan was to make your money, move on to the next deal, feign ignorance when it all blows up, get a bailout, and LET OTHERS PAY THE PRICE."
Didn't read further yet, but the part in all caps above guarantees it will happen again.
If Trump really wants a legacy as a populist, he'll stop this before it happens, or at worst let it happen with FISA judges and Gitmo cells waiting for every person with this mindset.
It is almost impossible for the ratings agencies and the regulators to keep up. Private capital is smarter and faster than either. Private Capital is also way smarter than the banks.However, private capital firms are sometimes too clever by half as the saying goes and can believe their own BS about how smart they are. There is no substitute for due diligence and almost nothing can save you from a borrower who intends to defraud you. Banks have indeed mostly left the middle market; they haven't been equipped to play there for some time. Lending in the bottom of the middle market and below often forces a lenders to understand assets and whether those assets are salable in a crisis. Asset backed lending can save you from being wiped out but it requires an up close & personal understanding of their collateral and whether it can be sold in distress for a recovery. And, you may have to take over the firm and run it to actually collect. I've been there and it ain't no cake walk. Even when you are super careful you can still be caught out by clever fraud. What do you do when the CEO, having won accolades for their acumen and feted by every angel investor in sight, embezzles from their own company, pays their husband egregious consulting fees, and then absconds to Italy? How do you protect against that? This kind of thing has probably always been an issue with small business lending but it frankly seems worse now.
I wrote about this in August as part of a column about defined contribution retirement funds being exposed to private equity. Details how the leverage upon leverage can lead to disaster.
I keep waiting for the bottom to fall out and am reminded of J.K. Galbraith:
"Only in the financial world is there such an efficient design for concealing what, with the passage of time, will be revealed as self- and general delusion."
"In a speculative boom, the tide of money covers a multitude of sins. When the tide goes out, the sins are there for all to see."
I was too young to have observed how the massive inflation of the 1970s started, but I wonder if the only choice now is between severe inflation and severe economic contraction. I'm convinced it's one or the other. Adding to all the peril you wrote about are things like cryptocurrency -- a damn shady sector.
"the only choice now is between severe inflation and severe economic contraction. I'm convinced it's one or the other"
Agreed. The retirement cohorts need to brace themselves to see their pensions go poof 90's-Russia style. Of course, they'll be blamed for their own demise, in the idiotic fights whipped up between the so-called "generations".
The “generations” vote for no better candidates than the Boomers. Perhaps even worse after examining the NYC election.
Same with Social Security
Unless the whole world goes down the drain (in which case it doesn't matter what you do), the financial security of many Canadian retirees like me—relying, as mine does, on dividends from heavily regulated Canadian banks and the stability of southern Ontario real estate (probably the two safest investments on the planet)—is essentially beyond threatening. I also have a lifetime pension indexed to inflation as a safety net; but it's the dividends that confer complete spending freedom without having to agonize over price hikes.
Well good on you. No need to think about the rest of us then. I'll admit to not being terribly economically literate but I'm struggling to understand what the point of your comment is?
Also, whenever one is told of "the two safest investments on the planet" ... run for the hills (or short the investments).
As with all bromides, the advice yours offers shouldn't be followed too categorically. The reasons why Canadian banks and real estate are sound investments in world context have been persuasive for decades, and explain why RBC and BMO stocks cost over a hundred dollars per share, and why the population of the greater Toronto area continues to grow exponentially while that of many major American cities is declining.
The dual point is that analysis which may make sense in an American context doesn't necessarily tell you much about the rest of the world, and that categorical claims like “retirement cohorts need to brace themselves” are risky, since financial and other sorts of security vary according to personal circumstances, whatever cohort one belongs to.
As for thinking of others, I support many charitable causes, and both my daughters and their families are in houses of their own because of my financial aid. How about you? There's an unattractive air of resentment in your comment; aren't you pleased to hear that at least some retirees are doing okay? Isn't this what you'd want for them, and isn't it good news that financial security is still a realistic goal, for them and for you?
I'm thrilled you support charitable causes and your kids have homes because of your financial largesse- here's a ribbon. I'm a retiree and I get by, but I'm not worried about myself or retirees in general- I'm worried about the rest of the population. We're not supposed to sacrifice the young to keep ourselves cushioned and I'm so disgusted to see that attitude so pervasive in Canada. The Boomers and the elbows up attitude disgust me. So no it's not resentment it's disgust. The cost of your cushion has been passed off in deficit after deficit to future generations. You may have worked hard for what you have but you got lucky when much of it's value ballooned (real estate). You got to buy a house and you'll get to collect your pension so don't you worry your little head that the pension fund will be empty the next generations go to collect.
What gratuitously mean-spirited comments, from someone who self-presents as a mean-spirited person. How do you know what my concerns and worries are, and on whose behalf? How do you know I don't feel as keen a sense of responsibility for the population at large, and for the young in particular, as you do? Do you really think such things are deducible from somebody's financial circumstances? That's not only unjust, it's simple-minded.
It's clear you're resentful all right, and irrationally so, if you resent 'luck,' something over which none of us has any control. As Simone de Beauvoir put it, “Some people labour all their lives just to reach that platform from which their luckier fellows are already departing.” That's the way the world has always been, and whether one is on the platform or making one's way toward it, all we can do is make the most of the opportunities available to us. I presume that's what you've done too; you're a fool if you haven't. Yes, my wife and I worked hard, and were also lucky; on the way through our joint life project, neither of us ever envied those who have more than we do, or felt guilty that others have less: everyone is situated somewhere on that continuum, with plenty of people both above and below them.
That includes you; so if you resent people who have more, you should logically be apologizing to the very sizable proportion of the world's population that's had fewer opportunities and been less lucky than you. In my view both sentiments are irrational, but at least you'd be logically consistent, and less hypocritical.
As for our “cushion,” our children and grandchildren—decades younger than you are—will inherit almost all of it. My wife and I don't have an extravagant lifestyle: the investments that generate the dividends that pay our property tax will pass to future generations intact. You'll have to forgive us that the alternative of instead turning the rewards of our labour over to people with an unattractive inter-generational prejudice (or any other kind of group prejudice) was never part of the plan.
He’s delusional. The world doesn’t need to go down the drain to put his precious “heavily regulated” bank and pension at risk. Just Canada needs to collapse, and Mark Carney is furiously working on stripping Canada of its wealth and shipping it to his masters in the City of London.
So, in Canada you really have nothing to fear from inflation? From servicing your govt debt which is greater than GDP? without reserve currency status? And your gov doesn't play games with inflation measurements? And no unrest will emerge from the less prepared if things in the West generally go south? I could go on, but my point is, regarding reliability, "past performance is not indicative of future results", especially as more than a few storms have been brewing on the world macro scale. Yes, it is highly possible "the whole [Western] world goes down the drain".
(?) When you have a polemical temperament, but no relevant rebuttal to what's actually been said, just create a straw man who's unconcerned about inflation or government debt, and attack this target instead. Justin Trudeau specialized in such evasion—he continually made points no one was contesting, as an alternative to relevantly addressing questions and issues—and apparently you're a disciple who's internalized the technique. Never mind that it commits a logical fallacy, annoying because of its transparency and the contempt it thereby shows for anyone whose supposed views it caricatures; do you truly imagine it's any more persuasive coming from you than him?
I realize a whole lot of pins were dinged here in your pinball mind (that's not an insult, closer to a compliment), but, for our audience as much as me, let's take it a step at a time so we all know where the ball is...
"Unless the whole world goes down the drain (in which case it doesn't matter what you do) ..."
It certainly would matter, if the sufficiently able would find new ways of organizing. As technology -- which includes all sciences, which includes psychology, which includes propaganda -- always improves, so can the technology of organization. Bottom line: No, it's NOT impossible to 'change the world'.
<soapbox> IMO, the first thing is to focus on things that matter. The last two centuries' histories demonstrate these are not, say, capitalism vs socialism, nor democracy vs dictatorship, but rather, intelligent psychopathy vs social normal people. The last one we barely know how to recognize, let alone contain, and where necessary, control. But it's one of the true problems. </soapbox>
" ... the financial security of many Canadian retirees like me ..."
My list was yanked off the top of my head, in turn from ideas that made sense and that I pulled, over time, from alt sites. This is an alt site. I'm never married to any idea. Are you here to troll alt sites, or provide such compelling arguments that they change minds? From the other comments, it seems your effect clearly reflects the former. First as a braggart, second as a rabbit hole into your mind.
" ... —relying, as mine does, on dividends from heavily regulated Canadian banks and the stability of southern Ontario real estate (probably the two safest investments on the planet)—is essentially beyond threatening. I also have a lifetime pension indexed to inflation as a safety net; but it's the dividends that confer complete spending freedom without having to agonize over price hikes."
Goody for you. Are you saying the rest of us can do all this too, or are you grandfathered into now-matured and/or closed systems, and are just taunting us? Could you be a pal, and point us all to some help on this? Thanks in advance.
--------------------
"(?) When you have a polemical temperament, but no relevant rebuttal to what's actually been said..."
That's why I'm hammering it out point by point, cuz I got lots of time to read, to (try!) to think, and to vent, you see ...
" ... just create a straw man who's unconcerned about inflation or government debt ..."
... as I am relying retired fully on a modest US gov pension, and I am quite sober about the potential need to off myself at some point in the not-too-distant future. As I said, like a pensioner in 90s Russia, it's coming to an gov-asserted "democracy" near you.
"Justin Trudeau specialized in such evasion— he continually made points no one was contesting, as an alternative to relevantly addressing questions and issues—and apparently you're a disciple who's internalized the technique." ..."
I see it this way: At the beginning of this thread, you were contesting the idea that your situation is safe. I raised (rather innocent, actually, though in some ways 'alt',) questions about that. I believe you, sir, are the one who didn't actually address them. Because I'm perfectly fine with you providing an *actual* withering criticism of my questioning debt/GDP ratios, the possibility of dangerously increasing inflation, etc., I can learn something.
" ... Never mind that it commits a logical fallacy ..."
Spell it out, then, for us idiots, shaming me and convincing the audience.
"... annoying because of its transparency and the contempt it thereby shows for anyone whose supposed views it caricatures; do you truly imagine it's any more persuasive coming from you than him?"
Great minds think differently, Mark. That's what makes them great. Please show us how great yours is by unpeeling the rhetorical onion you gave me just above. to show those arguments. Please. As you are pointing out, I'm an idiot and probably an asshole, so it shouldn't really be too hard.
I must be in a mellow mood today. I didn't take his comments as bragging. Just telling how he feels about his own future. I happen to agree with your version of how things will probably turn out.But he may have other resources he didn't mention..
Wow Anti-hip, I think I love you😉. You are far more informed, eloquent and patient than I am and while I'm a little invested so not entirely impartial this is the most brilliant ebuttal comment I've ever seen. And so nice about it, I'm going to frame it!
“No, it's NOT impossible to 'change the world'.”
OMG... straw manning is evidently an addiction. A simple acknowledgment that one's investment strategies, however prudent, aren't immune to general financial and civilization collapse doesn't qualify as a claim that it's impossible to change the world. Life has been changing the world since the first pond scum.
“The last two centuries' histories demonstrate... [etc.] ...I'm never married to any idea.”
Talk about irrelevant side-excursions; if you ever had a sense of logical relevance, it seems to have deserted you here.
“Are you here to troll alt sites, or provide such compelling arguments that they change minds?”
In a general way I'm perusing a news site to which I subscribe. In this specific instance I'm responding to a categorical claim about retirees by citing the experience of a retiree I'm in a position to know something about—myself.
“Are you saying the rest of us can do all this too...”
Why not? I never had money in my pocket when young, and didn't work in high finance; my earnings were adequate but modest. There's nothing preventing you from opening an investment account, or from investing in yourself by getting an education, which you can do at the public library for free. The major rewards from investing come at the end, after a lifetime of disciplined saving; and the extent of your diligence is something you control. No one else is responsible for it.
“Because I'm perfectly fine with you providing an *actual* withering criticism of my questioning debt/GDP ratios, the possibility of dangerously increasing inflation, etc.”
You're free to embark on whichever side-excursions tempt you. If you haven't yet figured out that any expectation I would join you in such journeys is fanciful, I'm sure you'll get it eventually.
“Spell it out, then...
“The fallacy of an "irrelevant reply" refers to several related logical fallacies where an argument's conclusion or response fails to address the actual issue at hand. The most common and formal name for this is Ignoratio Elenchi (Irrelevant Conclusion).
Key characteristics
The core of this fallacy is that a person "misses the point" of the debate. The argument they present may even be logical and valid in itself, but it does not address the original topic of discussion.
The fallacy involves one of the following:
Answering a different question than the one that was asked.
Proving a different, but often related, conclusion than the one that is at issue.
Related fallacies
While ignoratio elenchi is the broadest category, the "irrelevant reply" can manifest in several more specific ways, which are often classified as sub-types.
Red Herring
A red herring is a deliberate attempt to divert an inquiry by changing the subject to a new, often emotionally charged, and irrelevant topic.
Example: When asked about a financial scandal, a politician replies, "I think we should focus on the real issue: the high taxes killing our small businesses".
Straw Man
This fallacy involves misrepresenting or oversimplifying an opponent's argument to make it easier to attack. The irrelevant reply is an attack on the fabricated argument, not the actual one.
Example: One person argues for increasing funding for environmental programs. The opponent responds by saying, "My opponent thinks we should pour money into saving the planet while the working class suffers".
Non sequitur
Literally Latin for "it does not follow," a non sequitur is a broad term for a conclusion that has no logical connection to its preceding premises. It's the most general version of an irrelevant argument.
Example: "Our company is in a budget crisis, so we need to make the academic requirements stricter for students".
How to identify an irrelevant reply
To spot this fallacy, you can ask yourself a few questions:
Does the reply logically support the original claim? Look for a gap between the premises and the conclusion.
Is the arguer addressing a different topic? Distinguish between arguments that attack the original point and those that simply pivot to a new, unrelated issue.
Is the arguer proving a point that no one was disputing? The "irrelevant reply" often makes a solid case for a proposition that is not actually at issue.”
# # #
“A straw man argument is a logical fallacy where someone misrepresents or distorts an opponent's argument to make it easier to attack. Instead of addressing the actual argument, they create a weaker, "straw man" version of it and then argue against that distorted position. For example, if someone suggests the school needs more math classes, a straw man response might be, "So you think we should just ignore reading and writing?".
Misrepresentation: The core of the fallacy is changing the opponent's position into an exaggerated or extreme one that they never actually made.
Easier target: This distorted argument is then attacked, which falsely appears to be a refutation of the original, stronger argument.
Purpose: It is a rhetorical tactic used to make one's own argument seem superior by defeating an easy-to-demolish caricature of the opposition.
Example: A person might say, "I prefer a dog over a cat," and a straw man response would be, "Why do you hate cats so much?". The second person has misrepresented the first person's statement as an attack on cats, rather than a simple preference for dogs.”
# # #
You could have discovered the above for yourself simply by entering the phrases “irrelevant reply” and “straw man argument” in Google. If you're interested in more extended discussion, though, I recommend Irving M. Copi's Introduction to Logic. Most people have never opened a book of logic in their lives and wouldn't know Modus Ponens from Modus Tollens, or any other rule of inference; but you don't have to be one of them. An ancillary benefit of making the investment could be an increased capacity for producing posts of greater interest and relevance.
P.S. You probably will succeed in getting someone to waltz with you here. Evasion artists are adept at using sarcasm and other psychological prods (not excluding lies: “As you are pointing out [?], I'm an idiot and probably an asshole”) to lure people into arguing over long lists of contentious matters having no relevance for the original issue. The sensible response to irrelevance, in my view, is to ignore it.
No government plan is ever safe in an absolute sense. Governments get out of liabilities by printing money (inflation). Most government plans in the anglosphere are technically insolvent in real economic terms. That is, valued at truly economic rates of return for liabilities which are supposed to be certain to be paid, most government plans have less assets than liabilities. The Canada Pension Plan discounts liabilities at 5.79% according to the 31st Actuarial Report. But the 5 year rate on Canada Treasuries is 2.75% same as the long rate. The ten year is a bit higher at 3.25. By grossly overstating the risk free rate of return, they are grossly understating the actual liabilities of the system. Everybody does this. If an insurance company was asked to purchase a portfolio that exactly matched the liabilities, to "defease" the liability, they would buy Canadian treasury bonds whose cash flows exactly matched the cash flows expected to be paid out. the rates of return at which that would happen are 2.75% not 5.79%. The first order calculation for how much the liabilities are undervalued would be: ΔV/V = -D(Δy), where V is the value of the pension, D is the duration of the liability (a measure of the center of gravity of the cash flows in time), y is the yield or discount rate and Δ is the change operator. Retired lives often have a duration of 12. So the first order measure of the drop in value would be approximately -12x3% =-36%. Namely as a first guess, if total assets equalled actuarial liabilities, the CPP would be underfunded by 36% on a real economic basis. The state of California, counting all municipal, local and state plans is over 70% underfunded. Ain't nobody "safe" anywhere. BTW, this issue about the discount rates is a scandal within the actuarial community with the more economically savvy actuaries arguing the discount rates are too high and the old line entrenching knowing how bad this will make them look. The clue to understanding which side is right is to ask what a disinterested observer would do if asked to "takeover" the pension plan and "make sure" all the benefits were paid. Why they would buy Treasury bonds to match the payouts because Treasury bonds are certain to be paid. The rate on those is 2.75% not 5.75%!
(?) That there's no absolute safety we knew before you saw fit to inform us at length. Since a standard of performance no individual or institution can ever meet isn't in any real sense a standard at all, talk of 'absolutes' is an irrelevant side excursion that evades the real question of relevant risk. In this connection, if governments and banks go, you go. Meantime, they're relatively sensible investment vehicles.
As for real estate, only a small fraction of the world's population has ever owned property. It was said a long time ago, but it's still good advice: "Buy land! They've stopped making it!"
If banks go, you don't have to go. And you don't have to go even if gov'ts go. All depends on how and where your wealth is held. Even though CPP is inflation indexed, because they are really underfunded in economic terms, there will be a reckoning. When that comes, breaking inflation indexing will be one of the items on the table right alongside means testing for pension benefits. In short, the social contract you thought you had is going right out the window. It's not malicious, it's just math. But, if a very liberal government is in power, the pension plan is going to be likely used to redistribute wealth and income. If a conservative government, maybe not so much. But it's still a math problem and there's only so many places from which to grab assets to pay for the promises.
When credit freezes up the value of real estate crashes and crashes hard. If you have it financed your in trouble if it’s debt free you will be able to hold it but if forced to sell to raise cash you will be screwed
Or try to raise your own food on it..My back aches just thinking about it.
I have a nice garden and I enjoy raising vegetables
Safe as houses 😊
1) massive currency devaluation after Bretton Woods and abandonment of gold standard
2)Followed by supply shock (oil embargo
3) followed by repeated policy errors from Fed chiefs under Nixon, Ford and Carter
Carter did eventually appoint Volcker, but his first Fed chair appointment was G. William Miller, who served for 1.5 years and was a disaster.
“As chairman at the Board of Governors, Miller became known for his expansionary monetary policies. Unlike some of his predecessors, Miller was less focused on combating inflation, but rather was intent on promoting economic growth even if it resulted in inflation. Miller argued that the Federal Reserve should take measures to encourage investment instead of fight rising prices. He believed that inflation was caused by many factors beyond the Board's control.”
https://www.federalreservehistory.org/people/g-william-miller
A little unknown history. Paul Volker was the person who talked Nixon’s treasury secretary to abandon the gold standard. In other words Volker set your house of fire. Then when he was Fed chair he shows up with the fire hose and is claimed a hero by massively raising interest rates. Volker was no hero he was an arsonist ever single one of the people like Volkers are too smart for our own good.
Thanks, I didn’t know that about Volcker.
Though lots of people were advising going off the gold standard at that time. It had become untenable after the war spending of LBJ and Nixon (and the economic and competitive recovery of Europe in the 1960s).
The choice was between starting a depression or sustained contraction and deflation in the US to maintain the currency link to gold, or to switch to floating exchange rates, and there weren’t too many pols arguing for the economic contraction route (save the Goldwater wing). Political suicide.
Much easier to let purchasing power degrade continually over decades!
The political class always takes the path that they thinks keeps them in power longer.
I concur that policy makers have to choose between those two unpleasant options, but this unavoidable outcome is the entire argument against intervening in the free market. We can only blame ourselves and try to delay the inevitable.
Outstanding remarks.
JK Galbraith eh? Gotta read that guy.
As for “self and general delusions” some might add religions to that category? But then you wouldn’t have many friends.
Without going into this too specifically I will say that those of us in the industry have been pointing out the insane amount of debt PC companies have had to raise with capital inflows. Just look at the “investment grade bonds” with the highest yields on offer right now - top of the list are all private credit. When you borrow to lever there is NO room for negative outcomes…. Negative outcomes ALWAYS happen at some point in the cycle and then poof.
I am a great Taibbi fan but this article is mostly meaningless to me due to the use of jargon in it. Imagine trying to teach chemistry to a two year old using terms like orbitals, quarks, and Avogadro’s number (6.02 x 10^23). I’m not blaming you for being smart. I just want you to remember your audience—I am paying you to explain important news to me, but I’m really stupid about financial stuff. I want to understand what you’re saying. So, please use small words like “big fat liars,” “stealing money,” “hard working people,” “lazy watch dogs.” I expect that I’ll be shamed for being dumb, but I thought you might want to know. Thanks for noticing me.
Banks have loaned money to companies which carry too much debt to survive a recession. So if there’s a big downturn, banks are going to go to Congress for cash, again. They know they’re doing it. The Fed knows they’re doing it. It is starting to fall apart and they don’t care. /end summary
Anyone writing, “ orbitals, quarks, and Avogadro’s number (6.02 x 10^23)” cannot be “dumb”.
Like the learning of any language, start by acquiring a basic vocabulary. Start with this article. Google every mysterious term. Or find a primer and devote ten minutes a week to reading it. Read a couple Michael Lewis exposes’. A year from now, you’ll be awesome.
Oh, and by the way, your terms, “big fat liars,” “stealing money,” “hard working people,” “lazy watch dogs, are quite accurate.
And don’t forget “chumps in chains” cuz that’s most of us who contribute to 401K’s.
You are not alone. As a retiree just tell me if at all possible, when. I have a very small pension.
I'm with you. Check out Edward Seidel (spelling might not be correct). His Substack is specifically about pensions, state pensions mostly. It does not look good!
Thanks for the reference. I found his substack.
Correct spelling: Edward Siedle
Link to substack: https://pensionwarriorsdwardsiedle.substack.com/
I don’t know Seidel, but many state pensions are significantly underfunded, are increasingly investing in riskier assets and use rosy assumptions that a private company could never use. The state’s taxpayers will be on the hook.
Siedle (thanks for the correction Blimbax) says much of the same. State pensions investing in some very questionable private equity ideas.
Pensions have been so corruptly mismanaged it should be a scandal. Every one of them lies straight up telling you they’re picking “safe” instruments.
They are allowed to remain underfunded at a level that is not allowed with a corporate pension. This should not be the case, especially since the taxpayers end up being responsible for this underfunding.
This is partly because they are allowed to use aggressive rate of return assumptions in calculating their annual required pension contributions. Again, they use ror assumptions that a private pension could not get away with.
Once again, your government at work. For themselves.
Same here. I have several degrees in science, but finance is way too complicated for me to consider getting a PhD equivalent just to read the financial news. Truly, it's about the jargon.
Yes the jargon of all professionals is meant to confuse. The convoluted lending schemes are just meant to cover their tracks. In the end you are either getting ahead or falling behind. Math (arithmetic actually) is pretty simple. Just like our personal finance with a lot of zeros added.
Hey, don't sell yourself short. I think you understood more than you think as evidenced by your "small words" translation. But I'm with you. I had to reread so many sentences to try to get the gist that it probably took twice as long as it should have to read the article. This sentence never did make sense: "and as we know, PE funds a percentage of each purchase with debt raised through bank funding." I was okay up to "raised" where I surmised PE funds use borrowed money to do a portion of their financing 🥴, but I have no clue what "through bank funding" means. Are they borrowing borrowed money to lend to more borrowers? Their hands are moving so rapidly through so many pockets that no one is getting any benefit from being jerked off! (Sorry for the crude analogy, but that's my interpretation.)
Private equity buys a business or company, part with their own capital and part with loans from a bank. This is called a leveraged buyout. The new private equity owners put the debt they borrowed to buy the company on that company's books.
Vivid metaphors are the best! 😄
More voo-doo economics. I don’t pretend to really understand everything going on. But my bullshit meter is pegging out. Or maybe I am just too old to understand “modern” economics.
Me too - and this was a great learning opportunity.
Prompting the question, where has our CURIOSITY gone?
As long as there are no taxpayer-funded bailouts, it's simple caveat emptor. Once the government bailouts arrive, then we're all invested in private credit (Rich Helppie's warnings notwithstanding).
There will always be taxpayer funded bailouts funded by the middle class taxpayer because nobody gives a rip about them. Especially Congress.
And who elects congressmen? Who could be on the phones to, contacting media daily about their elected REPRESENTATIVES? Who should be a little more informed, a little more involved? Where flew PERSONAL RESPONSIBILITY?
That's right, blame the people for everything. Congress is not to blame. They are supposed to know how to walk, talk, and chew gum. Congress gets called and written everyday, but all that ever gets done is what they need to do to keep their power with all the wealth and privilege that comes with it. The lying Pravda "media" that we have is the propaganda arm for Congress, and is a complete joke and a waste of time. Go ahead, make the people the SCAPEGOAT FOR CONGRESS if you will. NOT ME.
Well yes, Congress. Beside you, me, the media (a BIG bad) and the rest of us. When Congress doesn't act, it's up to us to set them straight. I don't feel like I do enough - but I do more than those I know who do nothing. Our representatives need to hear more from us than from lobbyists. And there are way more of us - and way more of our votes that put them there.
Unfortunately, government bailouts are a question of "when," not "if"...
By whose authority?
Repeat this 100 times: "Too BIG to Fail"
And exactly how does that help the situation?
Congress, Federal Reserve, FDIC, etc.
Yes. But. They're contra-legal. Or I should probably say, how are they NOT contra-legal?
Theirs. They always do what is best for THEIR situations. They don't really care what we think..
Yes & got nothing for it..
Though concerned a little by the banks’ lending to them, let’s not forget that the Fed has provided them a LOT of liquidity by paying them interest on their overnight funds - a historical anomaly - while printing money like crazy during QE2 and Covid, and should be able to sustain some losses better than 2008. And that was an issue more with trading firms than banks. My bigger concern is the insurance companies. If they are placing a significant portion of their capital into these funds, the risk of losses is enormous and can remain well-hidden until a collapse. And sorry, insurance examiners are even weaker than bank examiners when analyzing risks.
Correct.
I can make this relatively simple, not that anyone in charge cares, because they make out great from The Grift(tm). But for the rest of us---
John Maynard Keynes was a very smart economist. He did not get everything right in his "General Theory...", but his mistakes were more on the political side than on the economics. More specifically, he argued that the roughest edges of an economic downturn could be ameliortaed by a mix of government fiscal and monetary policies, in the case of massive deflation, by pumping more money into the economy through government deficits and supportive central bank policies to let those deficits translate into more money in circulation. Conversely, when the economy is runnning "hot," the government should run surpluses, abetted by the central bank, to soak up excess money and avoid inflating the currency. (Parenthetically, common usage gets it mostly wrong, confusing price increases with "inflation." Inflation means increasing teh amount of money in the economy, which will usually lead to increased prices if carried on too far or too long... but prices of particular things can rise for other reasons, too, such as the supply chain problems during the worst of the COVID shutdowns. Or the current talk about tariffs. Tariffs can and will cause the prices of some things to increase, but will not in itself trigger a general inflation of the money supply that would justify the Fed keeping credit tight.)
Keynes never promised that the economy could be managed smoothly, forever, and no more business cycles. He argued only that in a case of extreme deflation (the Great Depression), government could and should take actions to counter that deflation so the economy could get back on its feet. And, once that happened, the government could reel all that back in, and while things should be balanced over the long run, adjustments could be made from time to time to smooth out the wildest swings.
Some decades ago, it became obvious that the government would not take fiscal actions to rein in inflation, because such actions (budget cuts and tax increases) are unpopular in the short term. So, we threw out at least half of the tools to implement Keynes' theory, and are left with only monetary policy, which is a VERY blunt instrument. So, when inflation begins to heat up, we tighten the money supply and make credit more difficult--essentially, strangle the whole economy. And when deflation threatens, we pump money and ease credit to grow the money supply. We overheat the whole economy rather than address the specific industries or areas that are problems. Those are the only tools we use. And we are very reluctant to do the tightening bit, because, like fiscal belt tightening (budget cuts and tax increases), it, too, is unpopular, and the asset markets, esp. stocks and bonds and related options markets, respond negatively. So, teh pattern has been that when it comes time to tighten the money supply and credit (raise the discount rate and buy in more securities) the Fed waits too long and then tries to compensate by doing too much. Boom and bust cycles being exaggerated by teh confluence of political and Fed incentives.
So, for decades we have been in a long-term ratchet where we increase liquidity whenever problems seem likely to arise, but when prospects look better we never tighten enough to "soak up" all that money and credit we just created. That is why price increases are perennial, and the Fed has given up on its mandate for a stable currency, redefining 2% annual "infation" (really, 2% annual overall price increases) as its goal. Which is ridiculous under any rational system, at 2% prices double every generation, but given all the above, is the best they can hope for.
The point of all this being that all that created money and credit has to go somewhere, in search of yield (investment returns). And, there are only so many good ideas and companies and assets out there, and not enough to satisfy the artificially enlarged demand for investment returns.
So, you get money chasing weak investments--really, speculations-- and in that environment, people will commit all sorts of imprudent and even fraudulent acts to get at that money. So, a market break and financial crisis every 10-20 years, as asset prices get bid out of line with what they can return, and then the crash when the Fed belatedly hits the brakes (for fear of inflationary price increases) and everyone realizes that at current asset prices, they will not get the return on investment that they planned on, so they take their losses and write downthe value of those assets, which cripples asset-colateralized lending and shrinksthe economy..
So, fraud is built into the system, as excess money looks for returns, and imprudent people and fraudsters pretend to offer for sale assets to meet all that demand. And the "investors" look teh other way because what choice do they have? The money has to be invested somewhere!
QED. As Charlie Munger said, "Show me the incentives and I will show you the outcome." The incentives lead to asset prices being unsustainably high due to unreasonable optimism and large doses of fraud, and the outcome is a cycle of "hot" markets followed by bankruptcies and market crashes when the optimism and fraud is revealed.
In a recent interview, Joe Manchin recommended term limits for Congress. This is the only way that budget cuts (and less likely tax cuts) can get done.
Rand Paul suggests the same.
There are constitutional questions, but if they can be got around, there remains the question of who really controls spending and tax bills: the elected members, the semi-permanent committee staffs, or the lobbyists. Term limits only can work if the elected members really control things at a granular level. Otherwise, term limits mostly make it very difficult and unlikely that any Member, let alone a working majority in both Houses, will gain the detailed knowledge and independence to act contrary to the wishes of the staff and lobbyists.
I respect Manchin's and Paul's (and several others') experience and arguments, but color me skeptical. I tend to think that after almost 100 years of the New Deal, the Fair Deal, the New Fronteir, and especially the Great Society, the public has been trained to believe that government not only can but should solve all its problems. As Zohran Momdani recently said in his victory speech in NYC, "no problem too large, no problem too small." For decades, there has been a word for most politicians who say that there will be some pain or discomfort on the way to a better future: "Losers." For every Thomas Massie, there are many, many nemes of forgotten losers.
The late Dick Cheney caught the essence of this decades ago, when he said that "Deficits don't matter." He was not talking about economics, he was talking about politics, and that nobody loses an election by spending a little more, or wins by advocating belt-tightening. Trump gets this, which is why he opposes entitlement cuts, esp to Social Security, when traditional Republicans argue for them. There is a reason why "Social Security reform" has been called "the third rail of American politics--touch it and you die" for many decades. And with the big entitlement programs (Social, Medicare, Medicaid) now far larger than either Defense or non-Defense discretionary, any macro-economically effective budget restraint has to include the very entitlements that the public will not allow.
Nothing lasts forever, but I suspect it will take a radical political and cultural break to get the country to again accept the reality that there are always trade-offs and sometimes one has to sacrifice in the present in order to invest in the future. Especially with all out politicians and media telling people that there really is a free lunch. Maybe Neil Howe's predicted Fourth Turning...? Or economic/financial defeat that displaces the US dollar from its pre-eminence, thus forcing the US to put its house in order in order to get the foreign exchange to trade with the world...?
You make excellent points. Jesse Ventura stated that it took about 3 months to get up to speed as a governor. Our typical Senator or Representative focuses on reelection, not legislating, the day after the election. Another alternative is deregulation. Increasing production can increase tax revenues to counteract increasing budget deficits if spending on nondescetionary items can be held in check.
I tend to agree with you that getting government out of so many things is a necessary (but not sufficient) condition for improvement. Our system was designed for 13 recently separate colonies that still did not trust each other, thinly populated, primarily agricultural and a bit mercantile (but hardly at all industrial), jealous of their rights and privileges and suspicious of a government's ability and interest to take power unto itself. At this point, the original idea of limited, enuerated powers has all but disappeared and exists only on the thinnest margins. It didn't fail for lack of success, it failed for inability to defend itself under changing conditions.
Some people, starting with the Progressives of the period around the turn of the 20th Century, argued that we needed a more powerful central government to meet the challenges, and that by constituting that government with experts (Platonic philosopher kings, in bureaucratic guise) we could avoid the tendency of politicians to aggrandize power and wealth. In teh ensuing 140 or so years, we saw Progressives and others of similar mind take over the government, and conclusively prove that government by experts is no solution at all, if desires enhanced freedom and liberty.
That seems to leave the only option on the table to be shrinking government from day-to-day control of our lives, and taking only the roles it was originally intended--- foreign affairs, defense, regulating internal commerce between the states, and assuring basic liberties to the people. Add a few other things, where state-by-state regulations and programs would be chaotic and create bad incentives, but otherwise, assure personal and property rights and uniform justice, and then get out of the way.
But, has there ever been a government, and governing class that willingly give up that much power? So, back to thoughts of a Fourth Turning...
As Thomas Sowell is famous for saying, “There are no solutions, only trade-offs.” You make a good point on term limits. The trade-off is the size of the war chest of incumbents and your points on established committees. I personally am willing to take the chance. Term limits appear to be effective at the State level. When Paul Ryan was ridiculed by the 'pushing Granny off the cliff' ad, I knew there was no hope for the people even to attempt to understand the seriousness of our economic situation. Party like it's 1999 until it isn't seems to be our course.
Things are complicated, but no sane observer can doubt your last point, as we go giggling toward the cliff's edge.
But I will note that the "pushing Granny off the cliff ad" likely had some Big Pharma money behind it, not merely Democratic politicians. Somebody bankrolls these things, hence, government by lobbyists.
Pedants will insist we are a representative democratic republic, but imho we are fast becoming an oligarchic kakistocracy. I see Trump and MAGA as a cri de couer against that, but looking at how MAGA is currently devouring itself, the smart money may still be on the kakistocracy.
I'll admit I had to look up kakistocracy, but when I saw the definition.... Well, 100%!
I had to look it up also. Is mhj actually code for George Will?
Wow, thx for this, makes way more sense.
You're welcome. btw, Salzman did not get anything wrong, he accurately describes the state of things in 2025. I am just trying to give the bigger picture on why this kind of thing keeps happening every few years.
“You’re not paid to do due diligence in this market.”
Oh wait, same phrase true for institutional doctors in the Covid era.(instead rational analysis was punished re masking, social distancing, lockdowns, early treatment, vaxxing a rapidly mutating respiratory virus with a non-immunizing vaccine, mandates, etc).
And the doctors who were doing their due diligence got destroyed, canceled, and de-monetized.
You’re right and the ruse of covid was used to create the inflation (rise in money supply). Articles like this are about symptoms brought on by the disease rather than an actual cure. Not to say it’s not a good article, it is for sure.
If you go back to fall of '19, you'll see lots of articles about how the financial sector is in trouble and they need some 'liquidity.'
Repo market was going bonkers. WallStreet on Parade may still have it on their sidebar.
In the 2008 financial crisis the Hartford Insurance Company had to buy a small money-losing bank in Florida in order to be rescued by TARP.
It’s all bubbles these days. It’s not just the financial system. The education system, the medical system, the electrical grid; you name it. All teetering on the edge. Even the military is a bubble: we don’t have enough missiles, our tanks are about 50 years old, and just look at the B-52…first flown in 1952!
The only question now is which bubble is going to start all the others popping.
The dollar is the ultimate bubble which in turn creates the everything bubble you refer to.
Some people say that culture precedes politics. I would say economics precedes culture; i.e. a bubble economy produces bubble economy people….or something like that.
One quibble- you are conflating S&P global’s middle market credit universe (which by definition are big enough credit users to merit the attention of S&P credit analysts, with the entire middle market company space.
It’s line asking a bar owner to opine on the drinking habits of the average American. They can only talk about the average bar drinker. They can’t tell us if the bar drinker is representative of the average American.
The quip about not being paid for diligence is scary, and it reflects oversupply of credit. Excess liquidity creates sloppiness.
Back in 2007 it seemed credit card loans were good risks because borrowers paid them off, but the reason they were able to pay them off was that someone else gave them a new card and incented them to move balances. Plentiful liquidity can impersonate solvency….until new liquidity stops and we see who can actually generate cash flow to pay off existing debts rather than relying on new debt to pay off old debt.
If engineers built bridges, like economists manage capital, would we would have any left standing?
"The game plan was to make your money, move on to the next deal, feign ignorance when it all blows up, get a bailout, and LET OTHERS PAY THE PRICE."
Didn't read further yet, but the part in all caps above guarantees it will happen again.
If Trump really wants a legacy as a populist, he'll stop this before it happens, or at worst let it happen with FISA judges and Gitmo cells waiting for every person with this mindset.
It is almost impossible for the ratings agencies and the regulators to keep up. Private capital is smarter and faster than either. Private Capital is also way smarter than the banks.However, private capital firms are sometimes too clever by half as the saying goes and can believe their own BS about how smart they are. There is no substitute for due diligence and almost nothing can save you from a borrower who intends to defraud you. Banks have indeed mostly left the middle market; they haven't been equipped to play there for some time. Lending in the bottom of the middle market and below often forces a lenders to understand assets and whether those assets are salable in a crisis. Asset backed lending can save you from being wiped out but it requires an up close & personal understanding of their collateral and whether it can be sold in distress for a recovery. And, you may have to take over the firm and run it to actually collect. I've been there and it ain't no cake walk. Even when you are super careful you can still be caught out by clever fraud. What do you do when the CEO, having won accolades for their acumen and feted by every angel investor in sight, embezzles from their own company, pays their husband egregious consulting fees, and then absconds to Italy? How do you protect against that? This kind of thing has probably always been an issue with small business lending but it frankly seems worse now.
I wrote about this in August as part of a column about defined contribution retirement funds being exposed to private equity. Details how the leverage upon leverage can lead to disaster.
Here is a link if anyone interested
https://open.substack.com/pub/thecommonbridge/p/private-equity-is-no-place-for-average?r=er71k&utm_medium=ios
When the money is fake, the rest of the economy is doomed to follow.