Inflation is colloquially defined as, “Too much money chasing too few goods (and services)”. Supply chain constraints get talked about, and these are widely blamed for the inflation we are seeing. Of course, supply limitations play into inflation, but to focus on them is to miss the elephant in room. The primary driver of this inflation is not “too few goods”, but “too much money.”
While the headlines tend to focus on the micro elements of the supply shock (the LA port, coal in China, natural gas in Europe, semiconductors globally, truckers in the UK, etc.), this perspective largely misses the macro cause that is likely to persist and for which there is no idiosyncratic solution. This is not, by and large, a pandemic-related supply problem: as we’ll show, supply of almost everything is at all-time highs. Rather, this is mostly an MP3-driven upward demand shock. [emphases in the original]
In Bridgewater’s terminology, “MP3” is “Monetary Policy #3”, and refers to massive deficit spending combined with central bank quantitative easing. We saw this implemented in 2020-2021 when the federal government pumped out trillions of dollars of stimulus payments and enhanced unemployment benefits, and the Fed instantly soaked up the bonds that were issued to pay for these trillions. This fed/Fed combo amounts to simply printing money on an enormous scale.
Those trillions of dollars funded a huge surge in durable goods purchases. By late 2021 the supply of these goods was well above 2019 (pre-COVID) levels, and even above normal growth trendlines. However, the supply and transport systems simply could not grow fast enough to accommodate this insatiable demand. Charts below substantiate this. To focus on supply chain bottlenecks of themselves is misleading. The primary driver for this inflation has been the trillions of dollars of federal largesse. The Fed knows all this, obviously, but Jay Powell (the Chief Enabler of this deficit spending) would likely not have been reappointed if he spoke too directly about the cause of this inflation. Hence the endless prattle about supply chains.
I recently read a statement that there is something like 1400 individual semiconductor chips in a typical modern car. I wondered, “Can that be correct?” 1400 is a lot of anything. I have torn apart whole PCs and found only a few dozen chips.
Chips in cars have big economic significance. As called out on a post back in March, COVID shutdowns of semiconductor plants and other factors meant a shortage of critical chips for cars. This has led to extensive shutdowns of car and truck assembly lines in 2021, affecting employment and auto maker profits. It is estimated that the world lost 11.3 million units of production in 2021 due to the chip shortage, and may lose another 7 million units in 2022.
But back to 1400 chips…I did not find the One True Pronouncement of chips in cars (a promising N Y Times article lay tantalizingly behind a paywall). But I found a number of statements that corroborated that order of magnitude, and also fleshed out the many uses for such chips.
Cars and trucks have something like 100 distinct electronics modules, and each module has multiple chips. Wiring in cars is expensive and vulnerable, so it is better to distribute the information processing rather than run a bunch of wires back to one central processor.
The chip supply situation should sort itself out by 2024, if all goes well. Meanwhile, electronics has become the tail that wags the automotive dog – – electronics have gone from being just 18% of a car’s cost in 2000, to being 40% of its cost in 2020 , and projected to be 45% by 2030:
I have looked at various mouse traps on Amazon. The reviews there are a tremendous source of information. Folks get passionate about their battles with the little rodents who invade and foul their homes. Some reviews soar to literary heights. Here is a user who pours out his despair over being bested by a mouse:
Earthlings Beware!!!! The Toughest Mouse in the World Still Lives: You Could Be NEXT!!!!!!!
Reviewed in the United States on June 30, 2020
These traps were incredibly easy to used and bait. However, I bought these traps To prevent my pets or children from getting injured and to spare my wife from picking up the dead mouse if I wasn’t home. In theory it was the perfect conceptualized mouse trap for a busy house. When this trap arrived I was ready to declare war on the invaders. I put on my camo gear, covered my face with camo paint took some peanut butter out of the cabinet and baited this rodent killing machine. I turned the switch to “set” and tucked it in a spot where I saw mouse droppings. Then I shut off all the lights, Turned on my night vision goggles and waited. Nothing happened, that fury bastard beat me, but I was determined to win the war. I repeated the process the second night only this time I used popcorn to make a trail to the plastic rodent guillotine. I set the trap and went to bed. By dawn I woke up like a child on Christmas, went running down the stairs and to the trap. Boom! The indicator on the side said mouse caught! The pride of winning this battle washed over me. I had defended my castle against an fierce enemy . But wait, why is the trap so light? Surely if a dead mouse was in here I would have been able to feel the weight difference of such a light and sleekly designed trap. I rotated the device in my hand to peer inside of the killing machine. There I stood, with all the pride draining from my short lived victory. The mouse had indeed been attracted to the trap, it followed the popcorn trail of happiness right inside of the devil’s mouth to feast on the peanut butter buffet set up inside. Once inside it tripped the killing mechanism as designed. But this mouse in my house was no ordinary mouse. He must have been a ninja mouse because he dodged the killing instrument likely with a three quarter lateral spin and landed on one hand. He proceeded to eat the peanut butter, then chew his way out of the trap to warn the other ninja mice. I was beaten, defeated by a mouse. I packed up my family and our belongings and moved to new house leaving our old house to the victor. At my new house though, we adopted 70 cats, and although we smell like a mixture of broken dreams and cat urine we never heard from the ninja warrior mouse or his friends again.
As noted last week, I am happily receiving 9% interest in my new crypto account at BlockFi. How can they do that? The short answer is that BlockFi lends out my holdings to other parties, who pay somewhat more than 9% interest to BlockFi. This model is common to essentially all of the crypto brokers who pay out interest, but I will focus on BlockFi because (a) I have skin in the game there, and (b) they have been fairly transparent about their operations.
On the simplest level, this operates like a plain bank savings account does. A bank takes in funds from depositors, and (to oversimplify) lends those funds out to borrowers. The bank then pays to its depositors a portion of the interest it receives from its borrowers. Up until the last few years, this bank savings account model worked pretty well; a depositor might receive something like 2-3% interest on a savings account or certificate of deposit. More recently, short term rates have been near zero, so depositors get almost nothing in a bank savings account.
As noted earlier, BlockFi pays up to 4.5% interest on Bitcoin and 5% on Ethereum. These are leading, high volume coins that are widely used in decentralized finance (defi). Here is how BlockFi describes the parties to which it lends (mainly) Bitcoin:
Who Borrows Crypto?
BlockFi works with institutional counterparties for trading and lending cryptocurrency. These counterparties look to us to help them provide liquidity for their businesses. But who are some of these borrowers?
( 1 ) Traders and investment funds who see a fragmented marketplace and discover arbitrage trading opportunities. Arbitrageurs need to borrow crypto in order to close mispricing between exchanges or dispersed markets. Similarly, margin traders need to borrow in order to execute their trading strategies. This is a simple example, but it demonstrates how arbitrage and margin trading activities facilitate price discovery, which is an essential component of developed markets.
( 2 ) Over the counter (OTC) market makers make money by connecting buyers and sellers who do not want to transact over public exchanges. OTC desks need to keep inventory on-hand to meet their client demand. Owning crypto outright is capital intensive and comes with the attendant risks of price fluctuations. Instead, they may prefer to borrow inventory in order to facilitate transactions. Liquidity is another essential component to healthy markets.
( 3 ) Businesses that require an inventory of crypto to provide liquidity to clients. This bucket includes companies like crypto ATMs. These businesses also need to be able to support withdrawals while keeping the vast majority of their crypto assets in cold storage. The liquidity we provide them helps with these basic and important functions.
A key piece of this lending is to require that the counterparty post adequate collateral for the loans. This is somewhat similar to a bank lending you money to buy a house, with the house as collateral for your loan. If you lose your job and cannot pay back the loan, the bank has the right to sell your house to recovery its money. Similarly, BlockFi wants to ensure that if something goes sour with their loan of your Bitcoin, they can get their funds back and make your account whole. Obviously, BlockFi customers like me are relying on BlockFi to manage this properly and to minimize lending losses. BlockFi goes on to reassure us:
One reason for opening an account where you can purchase cryptocurrencies is to speculate on their price movements. There have been many cases where some coin has quadrupled in a few weeks, or gone up ten-fold in a few months, or even a hundred-fold within a year.
Another facet of crypto accounts is that in some cases you are paid interest on the coin you have purchased and hold in your account. That was the main draw for me. I already have a little Bitcoin and Ethereum exposure in my brokerage account through the funds GBTC and ETHE, enough to feel the thrill of victory and the agony of defeat when they go up, up, up and down, down, down, but I am not a big speculator at heart. So, I am drawn to the so-called “stablecoins”, whose value is tied to some major regular currency such as the U.S. dollar. It turns out that you can get high, steady interest payments on those stablecoins.
There are several crypto brokers which pay interest on coins. Some names include BlockFi, Celsius, Nexo, and Voyager Digital. Several such firms are reviewed here. Initially I leaned towards Voyager, since it gives access to lots of the new, little alt-coins where you can 10X your money if you pick the right ones and jump in early. However, I still do my own taxes, and the tax reporting from Voyager looked daunting. Last I looked, they just provide a dump of all your transactions in a giant table, and it’s up to you to figure out capital gains/losses. The word on the street is that this is not as straightforward as it seems. Also, Voyager offered only mobile apps, not a desktop interface. All in all, Voyager seems more geared towards intense younger Robin Hood/Reddit crowd, punching daring trades into their phones at all hours.
BlockFi is quite staid by comparison. It only offers a few, mainstream coins. However, it is one of the best-established firms, and it provides a nice clear 1099 tax reporting form at the end of the year. BlockFi is backed by major institutional partners, and manages over $9 billion in assets.
Unlike some of its competitors, it is U.S.-based, and as such it is structured to function well in this jurisdiction. Also, its interest payouts are straightforward. In contrast, many of its competitors incentivize you to receive your interest in special tokens issued by those companies, which adds another element of risk. Finally, BlockFi allows you to immediately transfer money in and out of your account by using a bank ACH link. I wanted that flexibility since I plan to keep a portion of my cash holdings in BlockFi instead of in the bank, but I want to be able to access those cash holdings on short notice and without penalty. (Last week I described some of my struggles over using the Plaid financial app which manages the bank-BlockFi interface, but I was able to get past that).
All in all, BlockFi is boring in a good way. All I want to do is make steady money, with minimal distraction. Here is a listing of the interest rates paid for holdings of Bitcoin and Ethereum:
BlockFi only pays significant interest for smaller holdings of these coins. (We will discuss the reason for this seemingly odd policy in a future blog post; it is basically an outcome of BlockFi’s conservative financial practices).
For Bitcoin, the interest rate is 4.5% for up to 0.10 BTC, which at today’s prices is about $4,700. After that, the interest plummets to 1%, and to a mere 0.10% for more than 0.35 BTC (about $16,000). There is a similar pattern for Ethereum. If your goal is to hold large amounts of these coins and earn substantial interest on them, there are probably better platforms than BlockFi.
However, the interest picture is brighter for the stablecoins. The biggest U.S.-based stablecoin is USD Coin (USDC), which is backed by significant institutions. Gemini Dollar (GUSD) is smaller, but also takes great pains to garner trust. Its issuer, Gemini, operates under the regulatory oversight of the New York State Department of Financial Services (NYDFS). It boasts, “The Gemini Dollar is fully backed at a one-to-one ratio with the U.S. dollar. The number of Gemini dollar tokens in circulation is equal to the number of U.S. dollars held at a bank in the United States, and the system is insured with pass-through FDIC deposit insurance as a preventative measure against money laundering, theft, and other illicit activities.” GUSD is the “native” currency within BlockFi, though users can easily exchange it for other coins. At this point I am holding just GUSD, though if I put in more funds, I would plan to partially diversify into USDC. Besides being much bigger, USDC now runs on multiple platforms, whereas GUSD is limited to Ethereum; if Ethereum finally does switch from proof-of-work to proof-of-stake, it may be more subject to outages or hacking, so it would be nice to not be totally dependent on Ethereum.
For these two stablecoins, BlockFi currently pays 9% interest on holdings up to $40,000, and a respectable 8% on larger holdings:
A complete list of BlockFi interest rates (which change from time to time) is here.
The alert reader may at this point object, “Hey, you are losing most of the purported benefits of blockchain cryptocurrencies – – without holding the coins in your own wallet, you don’t actually own them, so you are back dependent on The System. Moreover, those stablecoins are centrally managed, not deliberately decentralized like Bitcoin and Ethereum. You are treating this like a plain bank account!”
My reply is, “Yes, I am treating it like a plain bank account – – but an account that pays me 9% interest, with no drama.” That is exactly what I wanted.
I finally got around to opening an account at BlockFi where I can buy cryptocurrencies directly. Later I will discuss why I chose BlockFi and what I plan to do there. For now I’d like to mention one roadblock I hit in starting it up.
Signing up for the BlockFi account itself was pretty straightforward. But when it came to actually funding it, I was required to use Plaid to handle transfers of funds to and from my bank accounts – – and Plaid wanted me to tell them my full username and password that I use to log into my bank account. “No,” I said to myself, “they can’t really mean that.” But yes, they do mean that.
Armed with these credentials Plaid is able to not only pull money out of my account (like, for instance, PayPal does), but they can also login as me and have access to every financial transaction I have ever done, every check I have ever written. It’s not that I have anything interesting to hide, but this level of privacy invasion creeps me out. Also, the sad truth is that any company, including Plaid and its partners, are vulnerable to hacking, so I am not thrilled at having my bank login information floating out there in cyberspace.
On their website, Plaid is nice enough to disclose the scope of its snooping:
We collect the following types of identifiers, commercial information, and other personal information from your financial product and service providers:
Information about an account balance, including current and available balance;
Information about credit accounts, including due dates, balances owed, payment amounts and dates, transaction history, credit limit, repayment status, and interest rate;
Information about loan accounts, including due dates, repayment status, balances, payment amounts and dates, interest rate, guarantor, loan type, payment plan, and terms;
Information about investment accounts, including transaction information, type of asset, identifying details about the asset, quantity, price, fees, and cost basis;
Identifiers and information about the account owner(s), including name, email address, phone number, date of birth, and address information;
Information about account transactions, including amount, date, payee, type, quantity, price, location, involved securities, and a description of the transaction; and
Professional information, including information about your employer, in limited cases where you’ve connected your payroll accounts or provided us with your pay stub information.
The data collected from your financial accounts includes information from all accounts (e.g., checking, savings, and credit card) accessible through a single set of account credentials.
Plaid promises not to sell or rent this personal data. Fine. But even if they don’t formally sell it, they may simply give it away widely. In their words:
We share your End User Information for a number of business purposes:
With the developer of the application you are using and as directed by that developer (such as with another third party if directed by you);
To enforce any contract with you;
With our data processors and other service providers, partners, or contractors in connection with the services they perform for us or developers;
With your connected financial institution(s) to help establish or maintain a connection you’ve chosen to make;
If we believe in good faith that disclosure is appropriate to comply with applicable law, regulation, or legal process (such as a court order or subpoena);
In connection with a change in ownership or control of all or a part of our business (such as a merger, acquisition, reorganization, or bankruptcy);
Between and among Plaid and our current and future parents, affiliates, subsidiaries and other companies under common control or ownership;
I’m sure Plaid means well, but I just didn’t like the sound of all that. So, I came up with a plan: I would start up a second account at my bank, with a slightly different name and a different account number, and just give Plaid access to that one account. The only thing I would do with that account is to fund my BlockFi account, so it would not have years and years of my other financial transactions embedded in it.
In the end, that worked, but it took a more time and phone calls than I expected. Opening the new account was a surprising pain, for reasons I won’t go into here. Then, it turns out that the bank doesn’t have a category for one person having two accounts with two different logins. There was nothing I could do about it online, so I had to talk to someone at the bank who had the power to limit my login authority to my new account. This meant that I now have to use my wife’s login to access my/our old account, which is OK. But it probably would have been cleaner simply to start my new account at some different (online) bank.
Anyway, just in time for the current crypto meltdown (Bitcoin is down more than 20% from its high a month ago), my account is active and funded. More on that in future installments.
The U.S. “stock market” is represented by various collections of stocks, such as the Dow Jones Industrial Average (30 stocks), the NASDAQ Composite (securities listed on the NASDAQ; weighted towards information technology), and the Standard and Poor’s 500 Index. The S&P 500 is an index of the largest 500 companies listed on the New York Stock Exchange and the NASDAQ, weighted by capitalization. The version of the S&P usually cited just takes into account stock prices. History shows that, over a reasonably long-time frame, the U.S. stock market rises. Here is a chart, using a logarithmic axis, of the S&P from January, 1950 to February, 2016. It shows a rise in value by a factor of about 65 between 1950 and 2016.
Below is a chart of S&P values from 1980 to 2021 on a linear scale, which compresses the earlier data and magnifies more recent variations. This shows the Covid-related dip in early 2020, which was followed by a meteoric rise as Fed and federal money flooded the financial system:
Source: Yahoo Finance
A lab technician I knew in my company in the 1990s took every bit of savings he had (about $50,000) and plowed it all into the stock of America Online (AOL). This was when the internet was just taking off, and AOL was a leading company in that field. My friend held on while his investment doubled, then had the conviction to hang on until it doubled again. He then cashed out with around $200,000, quit his job, got an MBA in finance, and ended up managing money on Wall Street.
With these sorts of success stories, and the (so far) reliable performance of the stock market, how hard can it be for the average small investor to pick a winning basket of stocks? Surprisingly hard, it turns out.
A study of the returns of U.S. stocks from 1926 to 2015 was published by Hendrik Bessembinder, a business professor at Arizona State University. A draft copy is here . He worked with total returns (stock price plus dividends). He found that the rise of the S&P is entirely due to huge gains by a tiny subset of stocks. The average stock actually loses money over both short and long time periods. In statistical terms, this is an extremely skewed data set; the mean return is greater than the median. There is a sort of Darwinian selection that occurs in a market index like the S&P 500. The companies that are doing well tend to get more represented in the index as their stock prices rises relative to other companies, while the relative weighting of losers automatically diminishes.
This asymmetry between winners and losers is partly a result of the following math: If you invest $1000 in a company that then tanks, the most you can lose is $1000. But if that company is one of the rare firms that really takes off, you could make many times your initial investment. If you had put $1000 into Microsoft (MSFT) in 1986, your shares would now be worth nearly five million dollars.
According to Bessembinder’s study, half of the U.S. stock market wealth creation had come from a mere 0.33% of the listed companies. The top five companies (ExxonMobil, Apple, GE, Microsoft, and IBM, at that point) accounted for a full 10% of the market gain. Each of these companies had created half a trillion dollars or more for their shareholders. ( A similar list of the top five or ten value-creating companies drawn up in 2021 would have a different set of names, obviously, but a similar principal has held in recent years – a huge portion of the rise in “stocks” in the past five years has been due to a handful of internet superstars, the FAANGM stocks).
Out of some 26,000 listed companies, 86 of them (0.33%) provided 50% of the aggregate wealth creation, and the top 983 companies (4%) accounted for the full 100%. That means the other 25,000 companies netted out to zero return. Some gave positive returns, while most were net losers.
The average stock which you might pick by throwing darts at the Wall Street Journal listings lost money 52% of the time in any given month, and 51% of the time over the life of the company. The lifetime of the average company was only seven years, with only 10% of companies lasting more than 27 years.
This helps explain why actively managed stock funds, where diligent experts analyze and select some subset of stocks in an attempt to beat the market, typically underperform the broad market indices. (The fees charged by these funds also drags down their performance relative to the market indices). This also explains why about half the small-cap stocks I have bought over the years in my little recreational brokerage account have lost money. I had thought I was particularly inept at stock-picking. Turns out I was just about average.
A recent headline in the Dartmouth student newspaper reads, “Dartmouth’s endowment posts 46.5% year-over-year returns, prompting additional spending on students”. That seems like really great investing performance. But the sub-headline dismisses it as less-than-stellar, by comparison: “The endowment outpaced the stock market, but fell short when compared to other elite universities that have announced their endowment returns.” After all, fellow Ivy League university Brown notched a 50% return for fiscal 2021, which in turn was surpassed by Duke University at 55.9% and Washington University in St. Louis at 65%. The Harvard endowment fund managers are a bit on the defensive for gaining “only” 34% on the year.
The stock market has done well in the past year, but nothing like these results. What is the secret sauce here? Well, it starts with having money already, lots of it. That enables the endowment managers to participate in more esoteric investments. This is the land of “alternative investments”:
Conventional categories include stocks, bonds, and cash. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.
It takes really big bucks to buy into some of these ventures, and it also takes a large professional endowment fund staff to choose and monitor these sophisticated vehicles. Inside Higher Ed’s Emma Whitford notes:
Endowments valued at more than $1 billion, of which there are relatively few, are more likely to invest in alternative asset classes like venture capital and private equity, recent data from the National Association of College and University Business Officers showed.
“Where you’re going to see higher performance are the institutions with endowments over a billion,” Good said. “If you look at the distribution of where they’re invested, they have a lot more in alternative investments — in private equity, venture capital. And those asset classes did really well. Those classes outperformed the equity market.”
…Most endowments worth $500 million or less invested a large share of their money in domestic stocks and bonds in fiscal 2020, NACUBO data showed. This is partially because alternative investments have a high start-up threshold that most institutions can’t meet, according to Good.
“You have to have a pretty big endowment to be able to invest in that type of asset class,” he said. “If you have a $50 million endowment, you just don’t have enough cash to be able to buy into those investments, which is why you won’t see big gains from alternatives in those smaller institutions.”
Virginia L. Ma and Kevin A. Simauchi report in The Crimson on Harvard’s Endowment, “Harvard Management Company returned 33.6 percent on its investments for the fiscal year ending in June 2021, skyrocketing the value of the University’s endowment to $53.2 billion, the largest sum in its history and an increase of $11.3 billion from the previous fiscal year.” This 33.6% gain, though, represents underperformance compared to Harvard’s peers; this is rationalized in terms of overall risk-positioning:
However, Harvard’s returns have continually lagged behind its peers in the Ivy League, a trend that appeared to continue this past fiscal year. Of the schools that have announced their endowment returns, Dartmouth College reported 47 percent returns while the University of Pennsylvania posted 41 percent returns.
Narvekar acknowledged the “opportunity cost of taking lower risk” in Harvard’s investments compared to the University’s peer schools.
“Over the last decade, HMC has taken lower risk than many of our peers and establishing the right risk tolerance level for the University in the years ahead is an essential stewardship responsibility,” Narvekar wrote.
In 2018, HMC formed a risk tolerance group in order to assess how the endowment could take on more risk while balancing Harvard’s financial positioning and need for budgetary stability. Under Narvekar’s leadership, HMC has dramatically reduced its assets in natural resources, real estate markets, and public equity, while increasing its exposure to hedge funds and private equity.
There it is again, the magical “hedge funds and private equity”.
Harvard’s fund manager went on to warn that the astronomical returns of the past year were something of an anomaly:
At the close of his message, Narvekar cautioned that despite the year’s success, Harvard’s endowment should not be expected to gain such strong returns annually. “There will inevitably be negative years, hence the importance of understanding risk tolerance.”
The following chart illustrates, at least in Harvard’s case, how extraordinary the past year has been:
The fiscal year of these funds typically runs September to September, so it’s worth recalling that back in September of 2020 we were still largely cowering in our homes, waiting for vaccines to arrive. The equity markets were still down in September of 2020, whereas a year later the tsunami of federal and Fed largesse had lifted all equity boats to the sky. So, it is not realistic to expect another year of 50% returns.
Final issue: can the little guy pick up at least a few crumbs under the table of this private equity feast? In most cases, you have to be an “accredited investor” (income over $200,000, or net worth outside of home at least $1 million) to start to play in that game. From Pitchbook:
Private equity (PE) and venture capital (VC) are two major subsets of a much larger, complex part of the financial landscape known as the private markets…The private markets control over a quarter of the US economy by amount of capital and 98% by number of companies….PE and VC firms both raise pools of capital from accredited investors known as limited partners (LPs), and they both do so in order to invest in privately owned companies. Their goals are the same: to increase the value of the businesses they invest in and then sell them—or their equity stake (aka ownership) in them—for a profit.
Venture capital (VC) is perhaps the more attractive, heroic side of this investing complex:
Venture capital investment firms fund and mentor startups. These young, often tech-focused companies are growing rapidly and VC firms will provide funding in exchange for a minority stake of equity—less than 50% ownership—in those businesses.
Some examples of VC-backed enterprises include Elon Musk’s SpaceX, and Google-associated self-driving venture WayMo.
Venture capital takes a big chance on whether some nascent technology will succeed (in the fact of competition) many years down the road, which has the potential to make the world a better place for us all. Private equity, on the other hand, tends to be somewhat more prosaic, predictable, and sometimes brutal. Here is putting it nicely:
Private equity investment firms often take a majority stake—50% ownership or more—in mature companies operating in traditional industries. PE firms usually invest in established businesses that are deteriorating because of inefficiencies. The assumption is that once those inefficiencies are corrected, the businesses could become profitable.
In practice, this often entails taking control of a company via a leveraged buyout which saddles the new firm with heavy debt, firing lots of employees, improving some strategy or operations of the firm, and sometimes breaking it up and selling off the pieces. This was the fate of several medium-sized oil companies that got in the cross-hairs of corporate raider T. Boone Pickens. “Chainsaw Al” Dunlop also became famous for this sort of “restructuring” or “creative destruction”.
Private equity activities can be very lucrative. But again, is there any way for you, the little guy, to get a piece of this action? Well, kind of. There are publicly traded companies who do this leveraged buyout stuff, and you can buy shares in these companies, and share in the fruits of their pruning of corporate deadwood. Some names are: Kohlberg Kravis Roberts (KKR), The Carlyle Group (CG), and The Blackstone Group (BX). The share prices of all these firms have more than doubled in the past year (100+ % return). If you had had the guts to plow all your savings into any one of these private equity firms a year ago, you would have had the glory of beating out all those university endowment funds with their piddling 50% returns.
The American patriots funded their Revolution largely by printing paper money, since they had no gold with which to buy supplies or pay troops. That got the immediate job done, but ended in disastrous inflation. Thus, when the U.S. Constitution was drafted a few years later, the states were explicitly forbidden to print paper money, and the federal government was deliberately not granted that authority.
Currently, printing of paper money is done by the Federal Reserve, which is essential a private bank on steroids, though under a certain amount of government oversight. What the U.S. Treasury (a part of the executive branch of the federal government) can do to cover its expenditures is to collect taxes, issue bonds and other debt, and also mint metal coins.
These coins are considered legal tender. The size and value of most of these coins is spelled out in31 U.S. Code § 5112 – Denominations, specifications, and design of coins . For instance, gold coins can be struck in certain denominations between $5 and $50. Sharp legal eyes have noticed, however, that the value of platinum coins is left unspecified. The definition of such coins is left up to the discretion of the Treasury Secretary. 31 U.S.C. 5112(k) reads:
The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
Thus, in theory at least, Treasury Secretary Janet Yellen could authorize the U.S. Mint to stamp 5 platinum coins, each bearing the words “One Trillion Dollars”. She could then (under heavy armed escort) walk these coins over to the Federal Reserve, and exchange them for nearly all of the $5.4 trillion in federal debt held by the Fed. These coins are by definition “legal tender”, which means that any creditor (bond-holder) must accept them to settle the debt represented by the bond.
Poof, the government would have another five trillion dollars to spend as it wished. No more bothering with issuing bonds to fund deficit spending, and no more pesky debt ceiling. This is a proposal which arises every few years, whenever the debt ceiling becomes an issue.
The Mint could even go ahead, pump out a total of 29 such coins, and retire the whole federal debt. No more interest to be paid on the national debt, no more hand-wringing over “can we afford it”. We can afford anything. Build it back better, tear it all down, and build it again even better. Jobs for all! And if people won’t work, send them money anyway. This puts us in a Modern Monetary Theory paradise.
Cooler heads have so far prevailed when the trillion-dollar coin ploy is proposed. Most parties agree it would be a violation of the spirit, if not the letter of the laws and customs of the land for the government to outright mint such quantities of fiat money. Arguably the purchase by the Fed of government debt effectively amounts to the same thing, since the Fed conjures money out of thin air with which to buy these bonds. (Furthermore, the Fed remits to Treasury the vast majority of the interest that Treasury pays on those bonds, so the Fed purchase of these bonds really is free money for the government). However, the interposition of the overall bond market in the process and having the Fed as a quasi-independent counterparty maintain at least the semblance of traditional government funding via public debt.
Also, as Cullen Roche has pointed out, the trillions of dollars of secure, interest-bearing government debt floating around the financial markets serve a number of very useful purposes to keep those markets lubricated and functioning. Such bonds also provide a seemingly safe place for citizens and pension funds to park their funds. To redeem all these bonds with platinum coins and thus to yank them off the markets and out of millions of brokerage accounts would be a major upset. Not to mention the raging inflation that would surely follow such naked, unconstrained money printing. But this all makes for entertaining financial theater.
A friend just texted me a link to an article by Alex Madrigal that came out yesterday in The Atlantic. Madrigal described how he made a last-minute decision to attend a wedding and associated gatherings in New Orleans. He knew there would be non-zero risk of infection, of course, but he had been fully vaccinated and he had reason to believe that essentially everyone else at the festivities was likewise vaccinated. Madrigal had helped to assemble and lead a consortium of journalists who gathered and published COVID data in the early months of the pandemic, before officialdom got its act together on reporting good numbers, so he is well-acquainted with the math of this disease.
He had been seeing maskless people laughing and chatting in restaurants, and he really liked New Orleans, and he wanted to support his friend who was getting married, and he wanted to enjoy some return to good old normal good times. So, he went and he mingled. Liquor flowed and happy chatter filled the air. And then he flew home.
He has a wife and two children, so to be on the safe side, upon his return he took no less than three PCR antigen tests, a day or so apart. All came back negative, even the one four days after the wedding. He did develop some cold symptoms, and upon his wife’s request, did one more swab at home on the fifth day. That was unmistakably positive, as was a follow-up test.
What followed was a nontrivial amount of inconvenience – – he went and lived in a rental apart from his family for at least ten days, his kids got pulled out of school, and he worried that if he had passed it to them, they in turn would need to quarantine. He is 39 and in top physical condition, and was vaccinated, so his course of illness was just that of a nasty cold, but that was still not fun. For him the most poignant aspect was the reaction of his two children:
My nonbinary 8-year-old was so mad and maybe so scared that they could barely look at me. My 5-year-old daughter proved her status as the ultimate ride-or-die kid. She brought a chair down the street so she could sit 20 feet away from me outside in her mask, as I sat on the porch in an N95. I’m not sure which reaction was more heartbreaking. It was as if one never wanted to see me again and the other didn’t want to let me out of her sight.
He wrote all this up in “ Getting Back to Normal Is Only Possible Until You Test Positive “. The concluding lines echo the title, “Right now most policies appear designed to make life seem normal. Masks are coming off. Restaurants are dining in. Planes are full. Offices are calling. But don’t be fooled: The world’s normal only until you test positive.”
My reaction, which I’d like to think would be a common reaction to this piece, is sympathy for the hassle that he and his family have been through, and appreciation for this reality check: the newer variants of COVID multiply so fast that you can get sick and spread the disease, even if you have been vaccinated. You probably won’t die, but getting infected could be very uncomfortable and inconvenient. At the macro level, some activities may never get fully back to pre-2020 levels, and on the personal level we should keep all this in mind before entering a room with lots of talking (or singing) unmasked people. In the U.S. there are still a thousand people dying every day from this communicable disease, and Europe is getting hit hard. I guess we all have pandemic fatigue, but a thousand deaths at a pop used to be considered a lot.
That would be a fine observation with which to end this blog post. But I will throw in one other observation: the internet is a pretty harsh place, and Madrigal’s article spawned at least two fairly ascerbic pushback articles. Claire Carusillo at gawker.com (which I know nothing about), in Alexis Madrigal: I Can’t Believe I, a Really Good Person, Got Covid , takes multiple jabs:
Alexis C. Madrigal, a columnist for The Atlantic and a cofounder of the COVID tracking project, got a mild breakthrough COVID case at a destination wedding in New Orleans. Instead of just going to bed for two weeks like a normal person, he wrote an essay about it wherein the only thing he makes clearer than his dedication to his workout routine is how he believes his story is a horrifying parable for our time.
It isn’t. It’s an unremarkable story from a public health perspective, though Madrigal’s inclusion of specific details make this piece a fascinating study of what it’s like to be an American man with a certain level of privilege who also just so happens to have a huge platform and a deadline to meet. Social distancing, it seems, has inflamed his out-of-touchness with what most people have endured over the course of the last 20 months.
… You may be thinking, spending a few childcare-light days at an Airbnb on your own block with a mild throat “tickle” that does not prevent you from either doing Peloton workouts or writing an essay for The Atlantic does not sound that bad. In fact, you may think it sounds a lot better than the trips I have taken to the Bay Area, particularly the family vacation we took to Alcatraz when I was nine. Either way, how dare you?
Over at the Atlantic, Alexis Madrigal engages in some light sadism, dedicating thousands of words to flagellating himself for the great sin of contracting the coronavirus….. He got a mild breakthrough case of coronavirus. But because the vaccines work well, he made a full recovery shortly thereafter.
….Children these days have dramatically calmed down from the bad behavior of the ’80s. This has brought with it the blessing of far fewer pregnancies and underaged smokers. But helicopter parenting, even before the pandemic, produced a significant cohort of children far, far too cautious and not nearly socialized well enough for adulthood. The share of teenagers who have ever had a job, gotten their driver’s license, or gone on a date, all previously the major milestones of young adulthood, has plummeted, and now we’re adding COVIDiocy to that trend?
An 8-year-old capable of making a parent abide by their preferred gender identity is probably also capable of bullying said parent out of having a normal social life. But the real fault belongs to the parent who would let a child live in such fear and fall so deeply into coronavirus delusions.
A virus for which we now have three vaccines and several new, inexpensive treatments does not provide any reason to stop living life to the fullest. To fail to explain this to children is the kindness of cowardice — or even cruelty masquerading as kindness.
Again, ouch. I think the two pushback articles make some valid points, particularly Lowe’s observations on helicopter parenting in general, and it does seem like the Madrigals’ kids had been given overly inflated fears about their dad’s prospects. That said, we need more in the way of civil discourse. The abrasive tone of these reactionary articles says more about their authors’ attempts to garner clicks than about Madrigal’s original earnest cautionary tale. It is a jungle out there.