The Progressive Ensign

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Category: Economy

Saving Democracy: The US Needs to Lead in Building Global Bridges Not Walls

(Saving Democracy Series:  this post focuses on how our POTUS has agreement by agreement ripped up the post WWII integrated global world that provided most of the people in the world with peace and prosperity that is unparalleled in history.  He has replaced peace with random acts of impulsiveness, doubt, uncertainty and threats which have caused major economic, cultural and societal damage to both emerging and developing countries.  A more dangerous world of nationalism along the lines of the 1930s is now emerging with all its possible horrible results.  First economic loss, then war. It is time to establish a new global order fair to labor and capital in a world order of respect, freedom of thought and speech with economic opportunities for all to establish global stability and peace.)

On July 2nd, the US Trade Representative announced possible $4b in new tariffs on the EU for subsidizing of Airbus, responding to Boeing concerns. Another episode of impulsive threats happened last May when POTUS threatened Mexico with a 10 % tariff on all imported goods if the flow of immigrants across the border did not stop by June 10th.  The action against Mexico threatened support for the just recently announced new trade treaty with Mexico – why sign a treaty when the US is just going to do whatever it wants. He backed down on the threat after the Mexican government made a commitment to redouble efforts at stopping the wave of immigrants from Central America. We can add these trade attacks to a long list of treaties, agreements or international organizations that our POTUS has taken the US out of (or renegotiated):

  1. Nuclear Arms Treaty – Russia
  2. Iran Nuclear Treaty – EU joint signators  
  3. Trans Pacific Partnership – TPP – with 10 emerging countries, Mexico, Canada and Japan
  4. NAFTA – replaced by two bilateral agreements under consideration by Congress
  5. UNESCO – UN cultural program
  6. UNHRC – UN Human Rights Council
  7. UNRWA – UN Refugee and Works Agency – supports 5M Palestinian refugees, when the US pulled out riots broke out for a week
  8. Paris Climate Treaty
  9. Global Arms Treaty
  10. G7 – developed countries council – POTUS wants Russia added back in, they were barred after annexing the Crimea
  11. Brexit – US has been cheering the UK leaving the EU, offering a ‘big agreement’ if the UK leaves the EU

POTUS has continued to bash NATO, a long standing military organization uniting Europe and the US against an aggressor. The constant undermining of the group opens a divide that adversaries may see as a crack to drive division and move ahead with probes or territorial gains.

The president has also focused on economic agreements – taking a unilateral approach around the provisions of the World Trade Organization and standing economic agreements on tariffs. He calls himself the ‘Tariff Man’ and has implemented with the acquiesce of Congress tariffs on allies like Canada & Mexico (new separate agreements under Congressional review), competitors like China, and cancelled a favorable import agreement for India.  Businesses are worried:

Source: Moody Analytics, The Wall Street Journal, The Daily Shot – 5/28/2019

Consumers have been hurt already in nine different product classes with increases in prices of over 10 %, as consumers or the importer pay the increase tariff on an imported goods including appliances (washer and dryer tariffs 12 months ago), furniture, bedding, floor coverings, auto parts, motorcycles, sport vehicles, housekeeping supplies and sewing equipment:

Sources: Department of Labor, Department of Commerce, Goldman Sachs, The Wall Street Journal, The Daily Shot – 5/13/19

The United States and China have been sparing since July 2018 in an escalating trade war, which seemed to be coming to a conclusion as recently as last April.  Then, the President announced in a tweet that China a reneged on commitments it had made and was ending negotiations.  The Chinese sent a delegation to try and restart negotiations but it was fruitless. For two months tensions escalated until a truce with a restart in negotiations was called as a result of a summit between President Trump and Chairman Xi at Osaka on June 29th.  The US relented on planned additional tariffs on all China imports up to $325b, and eased restrictions on Huawei sales by American companies in return for a vague promise by the Chinese to purchase more farm goods and to negotiate.

Sources: The Peterson Institute, for International Economics, BBC, The Wall Street Journal, The Daily Shot – 5/15/19

The Chinese have dug in for a long haul, threatening to cut rare earth shipments to the US and curtail further purchase of US Treasury bonds, with additional $60 B in tariffs at 25 %. We must remember the Chinese form of capitalism is really not ‘state based capitalism’ as the financial media likes to label in a benign way. The China economy is really ‘authoritarianism cloaked in capitalism’.  This is a mixed economy of state based industries subsidized with some free capital sectors kept in place by central planning. A key aspect of the this cloaking activity is the lack of transparency about who actually owns a Chinese company. In addition, the China Central Bank (PBOC) and sovereign wealth fund own about $200 B in US stocks providing insights and investment control. The Chinese government has deployed Orwellian digital surveillance to keep the people loyal to the state and not thinking or speaking freely. Internet news and social media sties are heavily censored by the state. That’s not democratic based capitalism. Another twist in the relationship with China, is Wall Street leaders have been instrumental in assisting the Chinese government in gaining approval to join the WTO years ago, and still make billions of dollars from fees and investments. The recent Chinese overture to open financial markets maybe a way for the Chinese to win over Wall Street and blunt the trade war of the GOP administration. The Trump Trade war with China is a failure, because it misses the true character of authoritarian government and economics how it uses the economy and capitalism to placate the masses to increase state control. Central government loyalty is the prime directive. Trust is missing between the people and the state – yet the people give up freedom for money when we here the Hong Kong protesters who vandalized the legislature building in late June criticized by mainlanders with comments like ‘they need to quit protesting and get a good job and buy things’. This is a bargain with manipulative leaders resulting in an unhappy ending, as people’s hearts and minds are imprisoned for money, the benefits with be fleeting and the costs dear.

Farmers in the Midwest, growing soybeans have seen their market collapse, other crops like corn, sorghum, wheat have seen huge price drops as China stopped buying from US suppliers. As soybean prices have fallen farm income has dropped almost 20 % and Midwest bankruptcies of farmers have risen above levels seen in the Great Recession.

Sources: Bloomberg, The Wall Street Journal, The Daily Shot – 7/15/18
Sources: The Federal Reserve Bank – Minneapolis, US Courts – 11/28/18

Since last fall when this Federal Reserve report was filed, bankruptcies have continued to increase at an accelerated rate, as farmers cannot get loans from banks to buy seed when prices are so low. The Administration has promised subsidies to farmers totaling $16bn yet the president of Soybean Farmers Association says he has not been able to see Agriculture Secretary Perdue or any of the subsidy money nor farmers in his group. Many farmers believe that when the money does come from the government it will not be enough and not replace the contracts for farm goos lost to Brazil, Russia and other countries.

Next Steps:

World War II was catastrophe for the world, millions of people killed, whole societies wiped out, along with an aftermath of starvation and depressed economies.  World leaders did not want to see a repeat of the WWII disaster.  They knew if they built a set of world-wide agreements and regional organizations to sustain and enforce those agreements there might be a better chance to prevent war from happening again.  The United Nations was founded in October of 1945 in San Francisco to provide a forum for discussion and implementation of world community building programs. The NATO alliance was founded by 29 countries who were WWII allies by approving the North Atlantic Treaty in Washington in April, 1949.  Economic disputes were to be settled by adhering to the General Agreement on Trade and Tariffs approved by over 100 countries in 1948. The World Trade Organization charted in 1994 succeeded GATT, headquartered in Geneva, Switzerland. Thus, many treaties and organizations were founded by most developed countries and many emerging countries to give economic, cultural and governmental support toward building a world community.  Presidents from both parties through the years since WWII have supported the uniting of diverse people around the globe so they all have a piece of the economic pie and security.

Now, our POTUS seems to think that ripping up global treaties and organizations, undermining them, and going it alone will somehow be better for the US.  Maybe things will get better for a few companies or sectors for a little while. However the trade deficit continues to trend worse since the January 2017 term of POTUS to the highest deficit ever with $55 bn last May,

Source: Department of Commerce,, Federal Reserve of St.Louis, Marketwatch – 7/2/19

Some soybean contracts have returned, yet the US still imports more from Europe, Mexico and Canada than we export, the tariff war is just making the deficit worse.   Already, we have seen with retaliatory tariffs from China, threats of reunification to take Taiwan – as a national publication likened to Lincoln unifying the United States. Today countries are going after their own goals spiraling downward into economic wars and eventually military action.  The lessons of the Great Depression, the Smoot-Hawley Tariff Act, harsh reparations on Germany and nationalism (rising today in a hideous way) led to WWII. When other countries see the US leader of the free world embrace ‘America First’ ambitions, why should they sit back and let America get ahead, the fight is on.  We should work with the capitalism elements and businesses in the China that are largely free of state control, building bridges to them, empowering them so country leaders see that the only path to lasting prosperity is when the people’s minds are free to innovate and create.

Yes, it is true, there were unbalanced agreements, the US did lose jobs to overseas countries, and maybe a few emerging countries took advantage the US.  But, we need to be thinking about helping people build their economies, or they will want a piece of the economic pie by force from the US. Job safeguards for American workers should be in place in all agreements, and fair levees and access to markets, protection of intellectual property, yet we need to work within the world order to make structural changes supported by all countries.

Corporate Debt Bubble Increases Probability of Recession

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: knowledge.wharton.upenn.edu

S & P 500 corporations have been borrowing money to buyback stock and increase dividends to investors.  Increasing their debt bubble could increase the probability of defaults. Research shows that defaults spike when the corporate debt to GDP ratio exceeds 44 %.

Sources: Bloomberg, S & P, The Wall Street Journal, The Daily Shot – 1/9/19

When companies take on so much debt defaults become a real possibility when sales fall, or profits are squeezed as debt payments become due. Apple recently announced that iPhone sales were falling in China and has decided to cut production of all iPhones by 10 %. Apple has plenty of cash, but their suppliers may not. Fedex in December announced plans to offer domestic employees buyouts because ‘global trade has slowed in recent months and the company expects trade to slow further.’ We can expect more reduced earnings and sales guidance beginning next week when 4th quarter reports begin coming in.

Sources: Gavekal Data/Macrobond, The Wall Street Journal, The Daily Shot – 1/9/19

When corporate debt to GDP ratios close in on 44 % or exceed that level recessions are likely to follow as the chart above shows.  There is much discussion in the financial press about whether there will be a recession or not.  It seems quite possible that record corporate debt combined with a likely fall off of sales in the 1st quarter of 2019 due to pull up buying by companies in the 4th quarter of 2018, will cause an economic slowdown or recession.  The slowdown is made much worse by corporations overindulging in debt to finance stock buybacks and dividend distributions. Plus, turning around these companies will be more difficult as defaults spiral downward, more companies are forced to close or layoff workers.  As workers are laid off they reduce spending, then reduced spending causes broad sectors of the economy to experience sales and profit declines.

Next Steps:

Where is the oversight of spendthrift management policies?  Directors are likely on stock bonus plans too, so they enjoy seeing the stock price goosed by share buybacks.  Where is a voice of moderation looking out for the long term viability of the company for customers, employees, shareholders and communities going to come from?  We need a national dialog on how to improve corporate governance taking into account the needs of all parties represented to reign in profligate borrowing .  Certainly, corporate executives did not start the trade war but they have borrowed way too much placing their firms in peril. It is management’s responsibility to look out for the interests of all effected by company success or failure.

GM: Case Study to End Share Buy Backs

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: GM Lordstown plant to be closed – gmauthority.com

Yesterday, GM announced a series of plant closings and layoffs of 15,000 workers in North America.  GM attributed the need to shift its focus to electric car development, trucks and SUVs that consumers were buying, as sedan sales are falling.  Actually, auto sales worldwide have been dropping for the past year.

Source: Bloomberg – 11/27/18

Jesse Colombo, analyst at Clarity Financial notes that while GM’s announcement focused on electric car development the plant shutdowns and layoffs really were driven by of slowing auto sales.  The auto market has been shifting rapidly with the development of driverless cars, ride sharing reducing the need to own a car, and urbanization causing policy makers to fund more public transit. The auto maker announced that it will end production of the Chevy Volt electric sedan with sales falling short of targets. GM has targeted gig economy drivers for ride sharing companies like Uber and Lyft by offering an on demand service for the Chevy Volt at $225 per week in Austin.  It is not clear what will happen with this on demand service marketing beta test with Volt production being halted.  GM has partnered with Lyft, and made a $500 million dollar investment in the ride sharing company 2 years ago.  Thus, GM has made some investments in key new markets and technologies, yet is behind in adjusting to sedan sales which fell by 11 % in third quarter.

At the same time the auto market is undergoing rapid change, GM executives have been taking care of themselves as a first priority.  Wolf Richter, editor of the Wolf Report blog reports that GM spent $13.9 billion in stock buy backs since 2014.

Sources: Wolf Richter, Wolfstreet.com, Y- Charts, Marketwatch – 11/27/18

GM stock purchases took shares off the market to reduce supply, while expecting stock demand would move the share price up.  However, as Richter notes GM share price has actually fallen 10 % in that four year period. So, much for boosting the price of shares to pad the executive stock compensation plan.  Instead of investing in new technologies, research, new plants, employee training, increasing wages and other key transition programs GM completely wasted $13.9 billion dollars.  Poor management judgement is now causing 15,000 workers to lose their jobs in the U.S. and Canada.  While we will not know over the last four years if good business investments would have prevented all the layoffs it is certain the economic damage to Midwest and Canadian communities could have been significantly mitigated.

Next Steps:

Goldman Sachs estimates that S & P 500 corporations will complete $1.0 trillion dollars in stock buybacks this year.  One trillion dollars will be wasted by U.S. corporations as productivity investments have lagged over the past 5 years, and average real wages have been stagnant for the 80 % in income since the Great Recession.  As the GM example demonstrates, besides hurting employee wages, making U.S. companies less competitive and inflating stock prices now workers are losing jobs due to executive mismanagement and myopia on stock price.

Prior to 1982, the Securities Act of 1934 held that stock buybacks were a form of ‘stock price manipulation’ and were not allowed by the SEC.  This policy was overturned by an E.F. Hutton executive, John Shad as SEC Chairman appointed by President Reagan.  He created a ‘safe harbor’ policy where corporations could purchase their own stock, only a certain times during the trading day, with disclosure quarterly and blackout periods prior to earnings reports. Corporations have used buy backs since then but stock buy backs took off in 2015 to $695 billion and almost doubled to $1 trillion for 2018.

We recommend an end to the stock buyback safe harbor provisions and a return to the pre-1982 policy, management in many corporations has lost their bearings on why the company exists – first priorities being workers, their families, customer communities, society and the nation not their own compensation plan. Making the corporation profitable and valuable to shareholders is a means to achieving our societal goals of a decent wage, quality housing, and the ability of families to support their children.  In October, we posted an analysis on how major corporations like Boeing, GE and American Airlines underfunded their pension plans while executing  billions of dollars in stock buy backs. Executives need to take responsibility for full funding of all pensions not wasting money on stock buy backs. It  is time with so many middle class and economic investment needs that corporations receive a direct SEC policy shift to end stock buy backs.

Banks Squeeze Consumers on Savings, Credit Card Rates

 

Image: thinkinnovation

The biggest banks are enjoying high profit margins at the expense of consumers. Today, the rates on savings accounts are the lowest as a percentage of the Federal Funds rate and credit card rates are the highest in proportion to the respective Federal Funds rate. The Federal Funds rate is the rate the Federal Reserve charges banks to borrow money.

Sources: Federal Reserve St. Louis, The Wall Street Journal, The Daily Shot – 8/1/18

Sources: Federal Reserve St. Louis, The Wall Street Journal, The Daily Shot – 7/31/18

The divergence on both charts shows how the consumer is squeezed on both sides of the financial ledger – receiving less for their savings than they should historically and getting charged much more on credit cards than is fair.

Today, the top five banks control 50 % of all banking system assets in our $15.3 trillion dollar system.  In 1990 the five largest banks held just 10 % of all bank assets.  The assets that Wells Fargo holds by itself equal all the assets of the top five banks in 1990.  As a result of the consolidation during the Great Recession our banking system is highly concentrated in just a few banks.

Next Steps:

The lack of competition is clearly hurting consumers in both financial directions, paying higher interest rates than are fair and not receiving the interest income they should. The key point is that present regulators are not doing their job requiring banks to pay higher interest and keep credit card interest charges in check.  Next, from our post on bank concentration we recommended a break-up of the big five banks:

Experts like Neil Kashkari who led the Bush Administration’s $700 billion bank bailout effort the Troubled Asset Relief Program, thinks these mega banks should be broken up. Now Kashkari is the Federal Reserve Governor for Minneapolis and has called for reducing the size of the big banks and distributing their power and control to provide a better shock absorber in the event of another banking crisis. He even calls for a 25 % capital reserve requirement many times the present capital reserve requirements the Federal Reserve has maintained in its stress test program.  We have seen with the failure of Wells to protect its customers from 3.5 million fake checking accounts created by its sales staff how poorly bank management performs.  Now, the bank is being investigated for improper referrals and transferring of funds in the wealth management division.

Enough is enough, our present financial system is too concentrated to effectively manage; distributing wealth, power and control back into regions is one way to ensure reasonable oversight and management can prevail.  In addition, we support calls for a modern day Glass-Steagall Act to separate investment banking (were sub–prime derivatives of the Great Recession were created) and commercial banking for retail customers.  We need to protect our citizens financial assets from the financial engineering and schemes of Wall Street. It is not a coincidence that today 90 % of all wealth is held by the fewest number of people since 1929.”

Building An Economy for the Common Good

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Image: Your Little Planet

In the past week, American Express won a gag order over merchants when the Supreme Court handed down a decision that allowed the huge financial services company to require all their merchants not to tell their consumers other cards had cheaper swipe fees.  Amazon announced the acquisition of Pill Pack a mail order pharmacy company, which sent financial shock waves through the drug store industry. So, it goes on, a Corporate Nation State (CNS) like American Express  or Amazon have their way limiting consumers choices to reduce costs and to take over the drug marketplace with no fair market rules in place.

Are these two companies focused on building the common good, fair play rules in the marketplace, doing what is right for consumers and taking social responsibility for the impact of their decisions?  No.  There is no countervailing power when Congress, The Supreme Court and the Executive branch are all doing the bidding of CNS organizations.

Corporations run our federal government by donating hundreds of millions of dollars (they have no campaign donation limits) each year to congressional campaigns through super PACs. Some CNS entities have large lobbying offices in Washington, like Amazon with 94 lobbyists knocking on Representative and Senator doors every day!  Do we have an army of lobbyists twisting arms for our interests?  No.

Where can we look for corporate reform to build the common good?  Larry Fink, the CEO of Blackrock, a $6.3 trillion institutional investment corporation, sent a letter to 1000 CEOs of companies they invest in telling them that beyond profits they would be evaluated on how well they are taking care of the environment, responding to climate change, having a diverse workforce, and fairness with their employees. We applaud Mr. Fink’s move, and look to more investors to call upon corporate management to be held accountable for their social responsibilities.

There are corporate accountability frameworks that have been receiving widespread acceptance and government support. In the European Union a group called the Economy for the Common Good (ECG), has over 2400 corporate endorsers and almost 10,000 individuals support their effort to require corporations report on a Common Good Balance Sheet their social responsibility activities. The EU has adopted a non-binding directive requiring companies of 500 employees and ‘public interest’ to report on human rights, diversity, labor rights, the environment, health and anti-corruption measures. The report is not included with the corporate annual report and is therefore not audited.

The Common Good Balance Sheet is divided into four key accountability areas: human dignity, solidarity and social justice, environmental sustainability, and transparency and co-determination:

Source: Economy for the Common Good – 6/29/18

The ECG is now working to make actual changes in corporate behavior by focusing on gaining support for these eight issues:

  • universal (all values and relevant issues)
  • legally binding
  • measurable and comparable (e. g. using points)
  • externally audited
  • generally understandable (for the public)
  • public (on all products, websites, shop doors)
  • developed in a participatory process
  • linked to legal incentives (taxes, tariffs, …)

The first phase has been completed of their initiative to gain EU nonbinding support next they look for a binding EU directive by 2020 followed by integration financial reporting.

We need to find corporate leaders in the US that see the vision of an Economy for the Common Good, embrace it and implement its ideas in their day to day operations – while measuring the results to show it is a better way to run a business.  A business can build an economy that works for all and still be a thriving profitable enterprise.

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