Coronavirus. Government-Mandated Economic Shutdowns. But is there a Third, More Fundamental Cause of the 2020 Economic Crisis?

I can’t answer that. But I can speculate.

Today’s economic collapse brought to mind a statement from an acquaintance during a long exchange on Facebook some time ago. In defending democratic socialism, the acquaintance said in 2018: “I fear we are headed for a collapse in the near future.” She was referring to an economic collapse, and blamed her fear on technology and  “unrestrained capitalism.”

I answered her misplaced blame in detail. But I never replied to her fear. The discussion was long and involved, so I never got around to it answering that fear. In view of the crisis we’re experiencing now (2020), I thought I’d post what I wanted to say back in 2018. Here is what I would have replied:

“I fear we are headed for a collapse in the near future.” 

Of course we’re going to have another collapse. The government’s interference into the economy has only increased since the 2006-2009 housing bust/financial crisis, which itself resulted from massive interference from the Federal Reserve, Fannie and Freddie, regulatory mismanagement, and the politics of “affordable housing.” What will cause the next collapse is anybody’s guess. But be assured that imbalances due to government policy are building up. This doesn’t mean the current (2018) prosperity is not real. But alongside the prosperity we’re having, the imbalances are building and danger is gathering beneath the surface. Trump’s regulatory reductions and corporate tax cuts will help, but will not nearly be enough.

FAST FORWARD: 

Sure enough, we got the catalyst--the coronavirus. A secondary, more serious catalyst is the massive shutdown of the economy engineered by our political leaders (It remains to be seen if this will ultimately cause more harm than good). These certainly are important factors. But I believe one of the biggest causes is getting too little notice. While those two are getting the public’s attention, a third and probably more important catalyst is greatly exacerbating the crash--the years of near-zero interest rates engineered by the Fed. These artificially low rates have incentivized massive increases in debt, both for individuals and for businesses (not to mention government), well beyond what people would do if markets set the rates. This huge mal-allocation of resources is now unwinding, giving a huge push to an already falling economy and stock market.

Let me focus on one sector--individuals. Typically, savers have reasonable low-risk interest-bearing options. But with interest income shriveling up, people have for years been looking for other options. That has meant common stocks. Hence, many people have been piling into stock market investments out of desperation for better yields. 

Now, I love stocks. They are a great way for average people to ride the coattails of business growth and entrepreneurial “prime movers” and build wealth over time. But thanks to the Federal Reserve’s near-zero rate policies, a lot of money has flowed into the stock market that shouldn’t have gone in--that is, has gone in for the wrong reason, yield. This means that a lot of people have put a lot of money into stocks that they normally would not have. This over-investment has made these people ripe for panic, and that panic is showing up in the stock market crash. This problem is particularly acute for retirees. Retirees, to put it bluntly, have been royally screwed for most of the last 20 years, when the Fed first reduced interest rates to near zero following 9-11. Retirees, who need a lower risk investment strategy and thus less stock exposure, were incentivized into taking on much more risk that prudence dictates. They are now adding substantially to the panic selling according to what I’m hearing on CNBC, the financial news program.

I believe that the acquaintance mentioned above was right, but not for the reason she believed. It’s not unrestrained capitalism (which doesn’t even exist, but should), but central planning, that is the problem. A collapse was going to happen. If coronavirus didn’t come along, something else would have, eventually.

As I said, I can’t say how the various factors influenced the current crisis. Economics is complicated. This period will be analyzed for years to come. But I am convinced that as long as the government coercively interferes in the natural workings of the market, and meets each crisis with more of the same, there will always be a realistic “fear we are headed for a collapse in the near future.”

Related Reading: 

A Tale of Two Bubbles: How the Fed Crashed the Tech and the Housing Markets: “Central Bankers appear to have learned little from recent history.”—Luka Nikolic for the Foundation for Economic Education. [This article was published on August 10, 2019. It is almost prophetic.]

The Financial Crisis and the Free Market Cure—by John A. Allison

A Free Market is the Only ‘Natural Order of Things’

Related Viewing:

The Pandemic and the Economy—with Onkar Ghate, Yaron Brook, and Rob Tarr from ARI

On the Question of When to Begin Taking Social Security Retirement Benefits

RE: ‘Is it a mistake to take Social Security and leave my 401(k)?’ by Karin Price Mueller

People become eligible to collect Social Security retirement payments at 62 years old. But each year until age 70, monthly benefits rise. So the longer you wait to collect, the higher your payments. The question is should you wait? In her New Jersey Star-Ledger financial advice column, the “Biz Brain”, Mueller answered the following question:

Q. What are the advantages and disadvantages to retiring, taking Social Security and leaving my 401(k) intact?

Mueller, citing one expert, advises:

[F]or many people, taking Social Security early is a mistake.

One of the most important things to retirees is consistent, stable and predictable cash flow, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

“If I have a product that would guarantee you an 8 percent annual increase up to age 70, was indexed for inflation and guaranteed for life, would you move all your money into that? That is Social Security,” he said.

Lynch said Social Security is one of the most underestimated benefits out there, noting the more guaranteed income you have in retirement, the less stress you will have when the market is volatile like now.

For that reason, it could be smarter to tap your 401(k) and let your Social Security benefits grow, but you should sit down with a financial planner who can assess your assets and cash flow and see exactly where your personal situation stands.

But would it really be “smarter to tap your 401(k)” early? 

Lynch’s advice seems to be typical of most advisers. At a glance, it seems like a no-brainer. But there’s more to the issue than Lynch and these other advisers lead us to believe. Lynch’s 8% growth argument is misleading, since it ignores other factors, such as the growth of the 401(k) that you would be forgo.

Suppose you retire at 62. You have a significant IRA nest egg. Let’s say you are entitled to $2000 per month at that time, which rises to $3300 by age 70, if you wait. If you wait, you must start draining your IRA. Rather than start taking IRA withdrawals, you take the $2000 per month, and let your IRA grow without touching it. At age 70, you will have collected about $178,000, along with having a much larger IRA. If you wait until until 70, you would collect $3300 per month, but with a depleted IRA. Furthermore, waiting until 70 would require 11+ more years to “break even” with the $178,000 in SS benefits you wouldn’t have already collected had you waited until 70. 

Waiting until age 70 to collect would leave you with no financial savings cushion--or a much reduced one--and the hope that you will live long enough to get back the $178,000 you left on the table for those 8 years. You’d have your higher monthly payments, but not the security and peace-of-mind that a hefty nest egg could provide.

Of course, if you have a big enough savings cushion to make withdrawals while still getting growth, it might make sense to wait until age 70 for that $3300 per month (although I don’t think so). And if you’re really healthy, you could be a big winner by living well past 81. 

But keep in mind that “guaranteed income” is not by any means guaranteed. It depends entirely on the whims of politicians. You have no property right to that money you pay “into the system”—and never have. You are not legally entitled to the promised benefits—and never have been. The politicians can lower or rescind the benefit at any time. As CATO reports, “One of the most enduring myths of Social Security is that a worker has a legal right to his Social Security benefits. Many workers assume that, if they pay Social Security taxes into the system, they have some sort of legal guarantee to the system’s benefits. The truth is exactly the opposite. It has long been law that there is no legal right to Social Security.”

I would think very carefully before taking the advice of waiting until age 70 to collect your Social Security benefits. 

Related Reading:

Wall Street’s ‘Unfairness’ Shouldn’t Scare the ‘Little Guy’ Out of the Stock Market

Caroline Poplin's Swiss Cheese Defense of Social Security

Conflicting opinions about Social Security: 

According to Brenton Smith, the temptation of collecting early could cause you decades of hardship. Mark Hulbert presents arguments in favor and against taking Social Security payments early.

Should you take Social Security at 62?

Why it's a bad idea to count on Social Security. Here's why you should not rely on what was originally intended to be an income supplement for the elderly.

Here's why it might be better to take Social Security at age 66 instead of 70

Clarifying the Corrupt Nature of Social Security

QUORA: My Scariest, Riskiest ‘Investment’ that Paid Off---and that I'll Never Do Again

QUORA *: Have you ever made a very risky investment that paid off big time?

QUORA *: What was the riskiest investment you made that paid off?

I posted the following answer to both questions (click here and here):

In 1980, I bought 100 shares of Sante Fe International, an oilfield services firm, for about $28 per share. Then I got greedy. I bought 400 more shares on margin. When the stock dropped to $24, I called my broker to buy more on margin. Though he tried to discourage me, I still bought 100 more shares, for a total margin loan of nearly $14,000. That was a LOT of money for us in those days.

As it turns out, 1980 was right at the peak of the 1970s oil boom. From a peak of near $40 per barrel ($121 in today’s dollars), the price of crude oil would drop to below $10 ($25) by 1986, on its way to about $6 ($15) by the late 1990s. We were about to lose our shirts. But one Friday in 1981, the stock didn’t trade. I called my broker, whose secretary said he didn’t know anything, but an announcement was pending for the following Monday.

On Monday, the government of Kuwait announced that it was buying Sante Fe International for $52 per share. I paid off my loan, got back my initial $2800 cash investment, leaving a total profit of more than $14,000.

Phew! As it turned out, the oilfield services stocks dropped precipitously, losing most of their value in the subsequent few years. The Kuwaiti government was criticized for overpaying for Sante Fe. But they bailed us (actually, me) out of a very stupid ‘investment’ decision. That was the first and last time I ever bought stock on margin.

Related Reading:

Wall Street’s ‘Unfairness’ Shouldn’t Scare the ‘Little Guy’ Out of the Stock Market

* [Quora is a social media website founded by two former Facebook employees. According to Wikipedia:

Quora is a question-and-answer website where questions are created, answered, edited and organized by its community of users. The company was founded in June 2009, and the website was made available to the public on June 21, 2010.[3]Quora aggregates questions and answers to topics. Users can collaborate by editing questions and suggesting edits to other users' answers.[4]

You can also reply to other users’ answers.]

Religionists Should Promote Capitalism and More Reliable Energy to End Poverty, Not ‘Protect’ the Poor from Fossil Fuels.

Anti-fossil fuel activists mustered a majority of shareholders to approve a measure to override the management of the world’s largest energy companies on an issue relating to climate change. As Bloomberg reports in The Church of England Takes on Climate Change—and Generates a 17 Percent Return, the activists won a proxy fight to require ExxonMobil “to provide a detailed report on how curbing climate change could affect its business.” The report has been steadfastly opposed by ExxonMobil’s management, which “argued that its current processes were sufficient to test its holdings for risk.”

Is this investor maneuver a backdoor attempt by ideological climate catastrophists to hamper Exxon’s business of producing and delivering fossil fuels? It’s hard to imagine that serious investors would want to harm their own investments, and some big investors are behind the initiative, which passed with nearly two thirds majority support. So maybe there's legitimate reasons to demand these reports. For myself, I wonder how Exxon is supposed to figure out how technological innovation or political trends are going to play out, especially since there is so much disagreement on the extent to which human activity such as fossil fuel burning has on climate change (contrary to environmentalist dogma, there is no consensus on this question—97% or otherwise). After all, “curbing climate change” means coercive government action, which means predicting future political direction in America and around the world. Add to this the always uncertain and surprising direction of technological and scientific advance. And forecasting “how curbing climate change could affect its business” must require virtual omniscience from Exxon.

But, I’m not anything close to being an expert on the matter. I’m just surmising.

One thing for sure is that for some, however, it is an ideological issue. Otherwise, why wouldn't these so-called “socially conscious” investors simply refuse to buy Exxon stock? As Bloomberg reports,

The Church of England rallied dozens of U.S. religious ­investors—from the Maryknoll Sisters to the Unitarian Universalist Association—to back the Exxon shareholder resolution,, along with giant ­institutions such as Hermes Investment Management, AXA Investment ­Managers, and CalPERS. It won 62.1 percent of the vote. Exxon’s board will now reconsider its opposition to the measure.

“This is a vital ethical issue and relates to our stewardship of the environment and our care for the poorest and most ­vulnerable in the world, who will be those most impacted by climate change,” Mason says. The Church of England fund is a signatory to the Principles for ­Responsible Investment, which are backed by the ­United Nations.

Humans have always faced climate danger. Nature is brutal to human life, causing a perpetual state of crisis for unindustrialized human life. In a real sense, humans have always faced a climate crisis. Always, that is, until capitalistic individual freedom unleashed modern industrial progress over the last 250 years, powered by reliable affordable mass-scale energy led by fossil fuels. Today, humans are safer, longer-lived, healthier, more prosperous, and happier than ever—but only to the extent they participate in freedom and industrial progress.

The religionists claim to “care for the poorest and most ­vulnerable in the world.” But they don’t need protection from climate change. They need what humans everywhere have always needed—protection from nature’s inherent dangers and the ability to adapt to nature and/or adapt nature to human needs. If the religionists really cared about the poor, they would work to make them non-poor so they can live better. Put another way, the poor don’t need a “stable” climate, with all of its dangers. They need massive amounts of energy of the kind great companies like ExxonMobil can provide, and the freedom to put it to use for their own benefit, so they can flourish along with the industrialized peoples.

Of course, the Church, from the Pope on down, are generally opposed to improving the lives of the poor. They worship poverty. That’s how you get into heaven—“It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.” They think a “vow of poverty” is a virtue. Where would the champions of the “poorest and most ­vulnerable” be if the poorest and most vulnerable entered the kingdom of fossil fueled industrial flourishing and became “rich?”

This, in fact, is exactly what has been happening. Freedom has been advancing around the globe, and people are choosing fossil fuels to drive progress in their lives. As a result, world poverty is at an all-time low, and life is getting better for billions of people even as fossil fuel use expands and climate change continues its mild and manageable pace.

Climate catastrophists singlemindedly focus on one thing: climate is changing, man is contributing, and to that extent it is bad. There’s absolutely no balance. But I ask, if climate is changing, and humans are contributing—so what? Why does it follow that climate change requires action to curb it? What are the benefits of climate change and more atmospheric carbon dioxide? What energy sources best promote human flourishing?  What will happen to human life if fossil fuels are forcibly curbed and increasingly outlawed, given that fossil fuels drive human betterment? What about the devastating negatives of solar and wind—namely, dilutedness and intermittency? Where does nuclear, the safest, cleanest energy source and the only currently available technology capable of fully replacing fossil fuel for electricity generation, fit into the “solution.” None of these kinds of questions are ever asked. The warriors against fossil fuels don’t care what effect their policies would have on human well-being.

Those who care about actually improving the lives of the poor, including the religionists, would promote capitalism and more reliable energy like fossils and nuclear, not ‘protect’ the poor from fossil fuels by peddling unreliable “renewable energy” and being a thorn in the side of great humanitarian companies like ExxonMobil.

Related Reading:

The Moral Case for Fossil Fuels—Alex Epstein

Fossil Fuels and Climate Change: Remember Life Before Them

The “Divest-Invest Philanthropy” Movement and its Statist Roots

“Forcing” Investment Away from Fossil Fuels Will Only Cripple Life-Giving Energy Production

We Owe Our Children a More Technologically Advanced Society, Not 'Preserved' Nature

Climate Alarmism and the Catholic Church; Faith-Based Allies in the War on Prosperity

Democrats’ Proposed Wall Street Trading Tax is Immoral and Regressive

The Democrats’ proposed party platform is full of unabashed statism. For example, Bloomberg reports Democrats Assail Wall Street With Plan That May Hit Mom and Pop:

Democrats are courting progressive-minded Americans by calling for a tax on Wall Street trades. If the party succeeds, the mom-and-pop investors they’re wooing could bear the brunt.

The Democratic Party’s platform doesn’t specify the size of the tax. A bill Representative Peter DeFazio, a Democrat from Oregon, introduced Wednesday would tack on a 0.03 percent fee onto stock, bond and derivatives trades in the U.S. He said it would “discourage the same speculative financial trading that led to the 2008 Wall Street collapse and 2010 ‘Flash Crash.’”

Though that doesn’t sound like a lot, it’s enough to potentially make a difference to the high-frequency traders investors rely on to complete their trades.

First, notice the bias: Bloomberg refers to supporters of the tax as “progressive-minded Americans.” But this and similar taxes that target specific segments are not progressive. Such targeted tax punishment is regressive, because it’s based on political inequality, not equal protection of the law. Further, the tax is intended to coercively enforce behavior that conforms to what government officials think should motivate people. As one supporter reportedly said, the tax is intended to “stem volatility and promote a long-term view among investors.” Such arrogance indicates the mentality of a thug who fancies himself more knowledgeable about what other people’s financial interests and goals should be than they are, and there’s nothing progressive about nanny thuggery.

Then notice the Big Lie, the standard Left statist mantra that switches the blame for the financial crisis away from the government culprits and unto private sector scapegoats; in this case, the “Wall Street speculators.”

Worse still, this proposed tax offers a peek inside the “progressive” mind. As Bloomberg reports, the tax will chill trading and reduce liquidity markets depend on, hurting small investors:

Tim Buckley, the chief investment officer of Vanguard Group, said taxes on financial transactions can backfire, upsetting a natural part of the market’s ecosystem. Vanguard, with more than $3 trillion in assets, is the investing gateway for millions of Americans.

“High-frequency trading plays a critical role,” he said. “When you put a tax on transactions, you risk damaging liquidity. As mutual fund investors we rely on having liquidity,” he added. “A drop in liquidity is bad for fund shareholders.”

Another opponent of the tax, Bloomberg reports, said

“If you look at what most of those high-frequency traders actually do, they are doing things that really support long-term investors,” said James Angel, a finance professor at Georgetown University in Washington, adding that the trouble with financial transaction taxes is that they “wind up being paid for by the mom-and-pop investors at the end of the day.”

So much for the Democrats’ concern for long term investing.

There may be differing opinions about how such a tax will affect the average investor. But one thing is sure: “progressive-minded Americans” don’t give a damn about the poor or the middle class or mom-and-pop or “the little guy.” They’re motivated primarily by hatred of success and wealth. They’re also motivated by power purchased by buying votes with promises of handouts. “The money could fund college tuition, Sanders argued during his campaign.”

The bottom line is that taxes targeted at unpopular or politically disfavored groups, or intended to coercively encourage or discourage behavior according to politicians’ whims, or motivated by envy or demagoguery or powerlust, are immoral as well as economically destructive. But this is the face of the modern, nihilistic, New Left Democrat Party.

Related Reading:

This Year’s Election Choice: 3rd Party or Best Platform?

Wall Street’s ‘Unfairness’ Shouldn’t Scare the ‘Little Guy’ Out of the Stock Market

Wall Street’s ‘Unfairness’ Shouldn’t Scare the ‘Little Guy’ Out of the Stock Market

In an article for MarketWatch titled Wall Street will always crush the little guy, but the stock market could be fairer, Victor Reklaitis and William Watts did their beats to scare the wits out of we, the “little guys.”

I left these comments:

I am a union plumber, and my wife is a school secretary—presumably the very people who are supposedly “crushed” by Wall Street. Yet we weren’t “left behind,” because we chose not to be.

One doesn’t have to be a financial expert to learn and implement sound investment strategies. There’s no need to worry about “the pros” and their supposed “advantages unavailable to the average investor”: There’s no need to “compete” with them. One only needs knowledge of basic investing principles, common sense, and perseverance.

Bear markets? The bears of 1981-82, 1987, 2000-01, 2007-09 worked in our favor. Wall Street “scandals?” We sailed through them, too. Flash crashes; conflicts of interests; “rigged” markets; high-frequency trading; CEO pay; insider access to data and information; “uneven” playing fields; blah blah blah? Who cares? It’s all noise—provided you think long-term and have a sound investment strategy and make regular contributions through thick and thin. I’m much more worried about government meddling in the economy—which hamper profit-seeking private enterprise, and causes periodic economic upheavals like the housing bubble, financial crisis, stock market crash, and Great Recession—than Wall Street.

Rather than frighten and belittle average people, it’d be much more productive to teach them how to invest and ignore the scare talk. My advice to average folks: Don’t let columns like this one scare you away from investing in the enormous wealth-building opportunities presented by America’s great public companies. Above all, never let some elitist convince you that you are a “little guy.” The minute you think of yourself as “little,” you’re sunk as an investor—and in life.

------------------------------

After spending most of the article scaring investors half to death, Reklaitis finally gets around to giving a little bit of advice. At the bottom of page 5, he writes:

The only strategy for the average investor is to stick to longer-term holding periods for investments. Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, says individual investors shouldn’t be trying to compete with high-frequency traders, adding that he thinks the “jury is still out” on how harmful or helpful so-called HFTs are, given that they add liquidity to the market.

And that’s about it, as Reklaitis slides back to telling us, on the sixth and last page, how “scarey” the market can be. For good measure, Reklaitis slithers in a slap at everybody’s favorite whipping boy—inequality:

Meanwhile, the distribution of stockholdings threatens to amplify concerns over growing inequality.

Stock ownership is highly skewed by wealth and income class, noted Edward Wolff, a finance professor at New York University, in a paper. The top 1% by wealth owned 35% of all stock held by households in 2010, while the top 20% held 91% of the total.

“The main conclusion is that the rise in the stock market certainly doesn’t benefit the average household,” Wolff writes. “The reason is that stock ownership, including 401(k) plans, is highly skewed,” with the average 401(k) amassing only $13,000 in equities in 2010.

Right. As if what the next guy’s investment portfolio looks like has any relevance to your investment portfolio—unless your a selfless envyer who measures his sense of self-worth with a yardstick labeled “others.” Reklaitis  concludes with:

It isn’t all doom and gloom. Investors have grown more disillusioned with active managers, particularly after the financial crisis, leading them to put a growing share of money into passive investments.

And more advisers are switching to fee-based business models and putting their clients in lower-cost funds rather than relying on trading commissions. That means lower costs for 401(k)s and mutual funds.

In the end, that all adds up to a “a direct transfer of wealth from the financial-services industry to the pockets of working Americans,” Bullard says, “and that is a great story.”

I love index funds. They dominate my investing strategy. But if everyone is coming around to index funds, that sounds like a classic sign of an impending change in trend. Perhaps actively managed funds may be the place to be for the next few years. We’ll see.

Related Reading:

"Greed" is a Two-Way Street

The "Big Lie" that Powers Big Government

In Defense of Special Interests - and the Constitution