Insolvent And Insolent

I woke up today to find the Dow Jones Industrial Average still so buoyant, having risen to 23,775. This is still 10% higher than on December 24, 2018 when the stockmarket crashed to 21,792 pts. How can that be? What do these Wall Street gurus know that we don’t? Back then, they were worried about the dreaded “inverted yield curve” of the bond market, and the Tariff War with China. Now, we have much much more to worry about – the ongoing Tariff War is still on but largely forgotten, the health challenges of “flattening the curve” of the pandemic overtaking concerns for any other curves, the ever-growing queues of people requiring handouts and of course, the global economic crisis from the lockdowns all over the world. People are getting wiped out on high streets and back streets, but Wall Street is still in another planet, seemingly unconcerned about the ravages of COVID-19 and despite the IMF’s 2020 projections of “the worst economic contraction since the Great Depression”. The US unemployment rate has skyrocketed from 4.4% last month to over 20% today. Over 26.4 million people joined the queue for unemployment benefits in the last 4 weeks. That is almost every man, woman and transgender in Australia. That is one very long queue. That is a lot of misery, heartache and desperation. Since the coronavirus lockdown, these people have lost their means of income. Most have yet to receive the one-off $1,200 stimulus cheque. Most have little savings, with rents or mortgages to pay, not to mention the basic necessities to survive. Yet, almost half of them still support their President. They still reckon he is doing a great job. Intriguing.

Is America insolvent? As insolvent as Virgin Australia who went into voluntary administration this week, owing more than AUD5 billion? I half-expected Richard Branson to be insolent and vengeful in his response to the Aussie government’s decision not to bail them out. The sharemarket boom had kicked on and on for the longest period (almost 11 years), the magnitude defying all fundamentals. The bulls were running on the back of share buy-backs. During good times, these corporations were returning capital to their shareholders rather than finding ways to re-invest and making their businesses more advanced and efficient. The profits earned in those years flowed back into their personal pockets, not retained for growth or for rainy days. The virus has exposed their greed and short-sightedness. Now, they are clamouring for bail-outs – at the expense of the taxpayers, of course. I own a small business. If my business fails, I won’t go knocking at the government’s door hoping they will open their coffers to help me. I know no one would care. This is still a world about the rich and powerful – they care for their own. They have a good understanding of how their world operates. If you’re too big to fail, they won’t let you. I was quietly happy that Richard Branson didn’t get his way. He still has his private island to pawn if required to save his 10% ownership of the company. George Packer of The Atlantic wrote that the coronavirus didn’t break America. It revealed what was already broken. He reckons they are living in a failed state. It is a very well written article that I encourage everyone to read.

I agree with George Packer. America is a failed state and may I add, maybe insolvent. A third of its debts is owed to other nations. As of February 19, 2020, the US debt was $23.4 trillion, i.e. before the $3 trillion COVID-19 stimulus packages. Its 2019 GDP was $21 trillion – this year’s will be much less, as the dole queues grow longer and the factories continue to shut. It would not surprise me if the debt to GDP exceeds 150% this year. Consumption represents 70% of the US GDP, Investment is 20% and Manufacturing makes up the rest. The more they spend, the higher their GDP is. Amazing but true. But during a pandemic, we all spend much less. During lockdowns, many are without incomes, savings or movements. The pandemic has revealed how broken the American economy is. It appears that this developed country is less developed than some of the poorest countries. A good measure is the number of hospital beds per 1,000 people. In the US, it is 2.9, far fewer than Kazakhstan’s 6.7, Belarus’ 11.1 or Barbados’ 5.8. Japan has 13.4, and South Korea 11.5. You could argue that a healthier population requires fewer beds. The US life expectancy is 79.1 compared with Japan’s and Hong Kong’s 85, Barbados’ 79.6, Maldives 79.9 or Slovenia’s 81.8.

An LA resident said they do not live in a third world country when she found human dung on the outside floor mat of her office building. There are some 36,000 homeless in Los Angeles, and without enough bathrooms and toilets, these people are simply defecating and urinating wherever they find it convenient, resulting in an urgent threat of a Hepatitis A outbreak. I was born in Penang in the middle of last century. Even then, I did not see such despair and abject poverty. Sure, there was that one Indian madman who I assumed was homeless due to his state of utter smelliness. He was as unwashed and unkempt as a bedraggled pariah dog. He scared the bejesus out of me when he walked into my father’s laundry shop one day. I was kicking a little paper football and unintentionally, I kicked it to his direction. But, he never defecated at our door-step. I still wonder what they did to him after they bundled him up and pushed him into a van. Why do I still think of him? Maybe it is because I see some of his traits in my mirror. My often unwashed and uncombed disheveled hair and the inclination to talk to myself aloud reminds me of him. Why do I persist when I know normal people will say it’s abnormal? Maybe it is because I find answers to my questions when I think aloud.

A sovereign default by the US? No, it won’t happen even if they do become insolvent. It is very easy for them. Being the owner of the world’s most sought after fiat currency, all they need do is print more money. It was Richard Nixon who dismantled the Bretton Woods system of international monetary exchange that relied on the gold standard. It was his way to combat increasing inflation, because they simply increased the value of gold to increase the money supply. America’s insatiable appetite to spend has always been to simply increase money supply. It defies the most basic of money tenets. Spend less than you earn. Nope, they will simply print more money. Actually, they do not even need to do that anymore. In the digital age, they just simply add a few zeroes to their bank account. Yes, out of thin air. For any other nation, if they print money faster than real output, the value of money drops. Look at Greece and the austerity measures imposed on it; is a lesson for us. In 2018, their debt to GDP was 181%. Will America’s come close to this? No matter how likely this scenario is, it is absolutely unlikely that any country will dare impose on the Americans the austerity measures the Greeks were forced upon. All the US have to do is speed up inflation. Inflation will reduce the value of the debt thereby making it much easier to pay it off. Not that the US can be made to pay off its debt. It would be akin to a rich but defenceless Chinese merchant walking into a hillside den of “Thu-fei” (heavily armed and lawless bandits), demanding their debt be immediately paid or else. The billionaire extraordinaire investor, Chamath Palihapitiya, suggests the US economy is hurtling down a cliff and at the end of it is a huge brick wall. The former Facebook executive and early Bitcoin investor proposes a deliberate inflationary response to pay off US debt. His proposal has a familiar ring to it, much like Trump’s Make America Great Again campaign. Bring back manufacturing jobs from China, the more inefficient and costlier, the higher inflation will be. What is left unsaid is they will have to forget about improved productivity and efficient allocation of resources. Tariff wars have to be a weapon of choice to fight off competition from more efficient and low-cost overseas producers. He left unsaid the necessity to have state-dominated industries much like that of China’s which Trump riled against. Palihapitiya’s solution will mean jobs in the millions of course, but it also spells inefficiencies and trade protectionism. I was surprised he did not instead preach about the routes to high tech innovations and investments in high value added strategies – the normal ways to generate huge incomes and pay off debts. Maybe that was a tacit admission that the US has already lost the technological race against China. The US Congress sees the Chinese advancement in technological know-how as a clear and present danger. In short, they see China as their enemy. What about dismantling their anti-trust laws that have traditionally promoted competition? Both digital and industrial economies are today dominated by corporate behemoths, quite often backed by the Chinese government. The US government of course also offers various schemes and industry-specific incentives to leap-frog over their competitors, but that is generally never discussed when accusations against China’s state-backed businesses are voiced. Boeing, the darling of American aerospace industry, is expecting $60 billion in federal aid to help tie their industry over the virus crisis.

The US owes China over $1 trillion. Normal behaviour dictates that the debtor should be thankful and courteous to the lender. I was very courteous to my bank manager. When he visited for a chat years ago, I even bought him coffee. “Would you like sugar? A lamington?” I offered generously. Anything to sweeten him up. Whereas the Americans treat their lenders with undisguised animosity. Trump repeatedly tweeted praise and appreciation for China’s efforts and transparency to contain the coronavirus. He even thanked President Xi on January 24 and again on February 7 for leading “what will be a successful operation”. On February 29, he praised China’s measures to prevent the spread of the virus, and said similar measures could be adopted by the US also. But, following his about-turn to deflect blame on the Chinese, thousands have signed up to American class action to sue China for $6 trillion. Missouri is the first US state to file a lawsuit against the CCP government. They were emboldened by Trump who on March 27, shifted blame for the pandemic on China, saying the Chinese treated America “terribly” by spreading the “Chinese” virus. It took him all of 27 days to change from praising Xi to blaming him. Such insolence. Overnight, he suggested injecting disinfectants into patients and exposing UV light inside their bodies might zap the virus. Will half of the voters still support him? Will they still reckon he is doing a great job? Intriguing.

Whaddaya got to lose? Drink Clorox, be strong as an ox.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.