On Liberty Watch

Yesterday, the Fed announced a 25 basis point reduction in the Federal Funds rate target. In the event,  the S&P 500 sold off about 3%, while market interest rates spiked upward. Two-year Treasury notes ratcheted up about 12 basis points to 4.35%, while 10 year T-notes rose about 8 basis points to 4.5%. 

Let’s put this in perspective by emphasizing bond market behavior. The Fed began its latest easing cycle at the September 18, 2024 Federal Open Market Committee (FOMC) meeting. At that meeting,  the FOMC cut the target rate for Fed Funds by ½ percent to 4 ¾ %. Subsequently, at the next 2 meetings, they voted to lower the target rate another ½ %. They did so in two steps for a cumulative reduction of 1% from the September meeting. 

The press, including the financial press who ought to know better, insists on referring to these policy steps as the Fed “lowering interest rates”. However, immediately after the Fed began its easing cycle, two-year Treasury yields began their ascent from about 3.6% to 4.32% where they are today. Similarly, ten-year Treasuries  began their rise from 3.69% to 4.57% where they are today. 

Certainly, some of the prior run-up in bond prices and reduction in yields is attributable to over enthusiastic bond traders looking for more rapid Fed rate reductions. But a rise of anywhere from 72 to 88 basis points in market yields during a time in which the FOMC reduced its Fed Funds target rate by a full 1% is extraordinary.  

Which may portend trouble to come.  

As it now stands gross Federal debt stands at about $35 trillion. Moreover inflation reports have been hotter than expected for the last several months or so. In addition, the labor market has remained fairly strong, although slightly weaker than it was a few quarters ago. 

That said, DOGE or no, entitlements are the driving force behind federal spending. According to the Economic Report of the President, Social Security, Medicare,  Medicaid  and other Health spending is projected to amount to $4.3 trillion in FY 2025. Add in another $965 billion for interest payments on the debt and we get to about $5.3 trillion, or about 73% of the federal budget. Which, by the way, assumes another $1.7 trillion in deficit spending. 

Now assume that the average maturity of the debt is about 4 years. That requires about $8.75 trillion annually to finance maturing debt. Add to that $1.7 trillion in new debt and we have $10.45 trillion in financing every year for the foreseeable future. 

How in the world is the market supposed to handle that when rates have already risen about three-quarters of a percentage point while the Fed is nominally easing policy? 

The upshot of it is that there is a good case to be made that the financial markets are in for a rough time unless Congress drastically changes the structure of our budgetary woes. That means cutting spending, especially with respect to entitlements.

Neither party has shown any inclination to do that. Trump has promised (for whatever that’s worth) to spare Social Security. The Democrats want to spend even more on entitlements and quite a few of them want “Medicare for All” added into the mix.  Certainly a recipe for disaster if ever we needed to be reminded. 

Time to be very cautious. 

JFB

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Back from Australia where we have been on tour with Road Scholar since November 4, 2024. And a lot has happened since then. A real lot.

Some examples: 

Donald Trump was unambiguously elected president on November 5. In addition to winning the electoral college, Trump won the popular vote, the first Republican to do so since George W. Bush in 2004.  

In addition, Republicans convincingly captured control of the Senate. They also managed to hang on to their historically slim House majority by their fingernails. 

Democrats inexplicably appear to be surprised at the results.

Daniel Perry, a marine veteran, was charged with manslaughter for holding Jordan Neely in a choke-hold on the F train in Manhattan. Neely had been threatening subway riders before Perry intervened. In the event, the jury returned a not guilty verdict in what was widely seen as a rebuke to New York DA Alvin Bragg for prosecuting the case to begin with.

Syria’s 14 year civil war has apparently come to an end and the regime of Bashar al-Assad in Syria has finally collapsed. Israel has devastated Hamas; Hezbollah has been severely wounded. Further, Israel has decapitated the leadership of both Hamas and Hezbollah.   

Partly as a consequence, Iran’s geopolitical weakness has been exposed. Iran’s “ring of fire” strategy of surrounding Israel with surrogates has failed. But we need to be clear-eyed about all this. There aren’t any good guys in the Syria saga. And Bashar al-Assad is now enjoying the sunny climes of Moscow. 

The fate of Ukraine is up in the air. So is the path forward for Vladimir Putin. The plans Xi Jing Ping has for Taiwan remain unknown and perhaps unknowable. 

Luigi Mangione, a 2020 graduate of the University of Pennsylvania, has been charged with the murder of United Health Care CEO Brian Thompson. The murder of Thompson is actually being celebrated in some quarters. Taylor Lorenz, formerly of the Washington Post and New York Times, is one of the cheerleaders in this regard. Here for instance is what she posted on Bluesky “People have very justified hatred toward insurance company CEOs because these executives are responsible for an unfathomable amount of death and suffering,”. 

A little context here. There are some people expressing shock that the apparently pre-meditated assassination of Thompson is being celebrated in some quarters. But there is no reason to be shocked. It is part and parcel of what historian Richard Hofstadter called the paranoid style of American politics. 

When in the 1960s H Rap Brown (not one of my favorites) said that “… violence is necessary. Violence is a part of America’s culture. It is as American as cherry pie” he was not wrong. We have gone through several violent eras, of which the latest is but one example. 

We had, for instance, violent resistance to the Civil Rights movement in the 1950s and 1960s. Who can forget Lester Maddox, axe in hand, standing in the schoolhouse door? Or Bull Connor unleashing the dogs on Civil Rights protesters? Or the Vietnam war protests that turned violent; or the bombings that several campuses experienced? Or race riots in the cities? Or the anti-globalization protests of the 2000s? How about the Black Lives Matter demonstrations that CNN described as “mostly peaceful”? 

Unfortunately, we do not suffer from a lack of examples of politically inspired violence. Perhaps though, we can step back, take stock and allow reason to dominate the discourse rather than bumper sticker slogans. That shouldn’t be asking too much. 

JFB 

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A Tim Walz appointee speaks. Link Below.

https://x.com/nickineily/status/1839302520310571174

JFB

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With the election just over 2 weeks away we are approaching peak hysteria. Each candidate claims that if the other candidate gets elected the world will come to an immediate grinding halt etc. etc. Plus both sides have their legal teams fired up and ready for combat in the event the other side wins, irrespective of the actual merits. 

Of course partisans on either side of the divide do not concern themselves with the merits of the case or with actual facts; simple assertions will do just fine, thank you very much.  And the talking heads of the commentariat, who read each others columns, are perfectly content to repeat the conventional wisdom as if they possess unique insight into the game. 

They don’t. 

Let’s take a trip down memory lane. Remember back in 2016 when it Hillary Clinton had it in the bag? Or in 2022 when the Republicans would be the beneficiaries of a Big Red Wave that somehow mysteriously failed to materialize? Or that the Trump candidacy was bound to antagonize Hispanic voters? 

The ready-made excuse among the commentariat was that “the polls” were “wrong”.  This despite the fact that low quality and infrequent state polls were put in the same category as frequent and high quality national polls, which, by the way, were essentially correct about the aggregate vote, but they didn’t measure the distribution of votes across states.

This time, in a vacuous campaign most notable for its degree of personal animosity, we are once again being consumed by the horse race aspects of the campaign. This comes at the expense of missing what in retrospect will become obvious. 

First, the nation is fairly evenly divided. Which means that the winner will not have secured a mandate, though the winner will undoubtedly declare one.  Second, there are two major (and related) questions that America faces. Those questions have been largely ignored by both candidates. 

The questions are: (1a) what should America’s role in the world be? (1b) is the United States willing to pay the price of being the global hegemon that continues to enforce the post WWII Pax Americana? Or (1c) is it ready to cede the space to another power or powers? 

(2) A statement: U.S. public finance is a mess. Accumulated debt is about $35 trillion. We pay almost as much for interest on the debt as we spend on the military. Question: Is the United States willing to get its public finances in order and begin to reduce its dependence on debt finance?

Questions A and B are related because together they imply a massive shift in resources from the domestic sphere to foreign affairs. That is if the United States wishes to maintain its global hegemony. Even if not, we are rapidly approaching the point where key strategic decisions will have to be made.  The reason why is that piling up debt at a rate of 2 trillion per year as is projected (using rosy assumptions!) is simply not sustainable. 

In addition, military spending is inadequate to maintain, much less increase our capacity to enforce a 21^st century Pax Americana. Further, simply maintaining the current course implies a drastic reduction in living standards across America.

To see why consider that the vast majority of domestic spending does not contribute to economic output. Instead it represents transfer payments. Also consider that, despite the illusion to the contrary, debt finance is not free. The debt has to be paid back. The money that the federal government borrows is money that could have been used by the private sector. Which means that all that borrowing slows growth. And anybody who thinks that the government’s use of funds is more efficient than the private sector’s is, to put it mildly, dreaming. 

Meanwhile according to the latest Economic Report of the President outlays on national defense dropped from 16.35% to 13.37% of the federal budget from 2001 through 2023. At the same time outlays for spending on Health, Medicare, Income Security and Social Security combined rose from 58.6% to 63% of outlays. A lot of that is borrowed money.

Since borrowing simply represents deferred taxes, we have outstanding deferred taxes of about $35 trillion—and rising by about $2 trillion per year as far as the eye can see.  Not only is this unsustainable, both candidates are promising to either cut taxes or spend more on plans that make zero economic sense. For instance, Donald Trump says he won’t tax tips; Kamala Harris promises a $25,000 give away to first time home buyers. Neither proposal, essentially vote buying exercises, makes any economic sense. 

Donald Trump promises to increase the deduction for SALT taxes—thereby negating one of the sensible things he did in his first term. Kamala Harris means to eliminate “price gouging” through price controls, a proposal that any freshman economics student would (or should) laugh at. 

And to boot, notwithstanding the passions of the ignorati, the well being of the US economy and American living standards depend on global free trade, global Liberalism and freedom of the seas. But we have nations that are working hard at eliminating those prerequisites. 

The major players that stand in opposition are China, Russia, Iran and North Korea. The only nation capable of standing up to them and enforcing a rules based global order is the United States operating in conjunction with its allies. That will require both soft and hard power. Which in turn will cost money. 

The usual dodge so beloved by politicians—which is to say that the other guy will have to pay—is no longer tenable. There will have to be a substantial reordering of the entitlement state and a significant increase in military spending for the foreseeable future. All of which implies that: entitlements have to be reformed, spending growth in general will have to be reduced with the proviso that military spending will have to rise. Further,  the US will have to readjust its strategy from conflict avoidance to one that encompasses both active and credible deterrence. In addition the US along with its allies, will have to advocate for the classically liberal values of Western Civilization instead of apologizing for them.  

That will require real and sustained American leadership. And neither presidential candidate gives the slightest indication of having what it takes. 

JFB

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Next time you hear about threats tp democracy, remember this video.

JFB

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I write this not as a partisan. Actually I have no use for either ticket, or for that matter, any of the players that constitute said tickets. I suppose that makes me a quadruple hater in that I can’t stand either ticket or any of the players on them. But because I have retained my sense of humor, I simply laugh at the truly awful arguments the candidates make for their respective “positions”. 

However I am a student of the game. And so I have studied the various (rather pathetic) machinations of the candidates as they scramble for the few remaining voters that remain to be convinced. So here is my analysis. 

Each candidate has weaknesses that would ordinarily be fatal to a candidacy. But we are not talking about A-list candidates, which is partly why no one has scored a knockout punch.  More importantly, neither candidate has a coherent, much less plausible theory of the race. As a result, each one continues to struggle gamely toward the finish line hoping against hope to somehow garner the 270 Electoral College votes needed for victory.   

So what exactly is the Trump theory of the race? It is that Biden is bad. That, mingled with all Trump’s grievances, is what the race is all about from the Trumpian perspective.  Not to mention that Biden committed the ultimate sin of beating him in 2020, turning Trump into what he fears the most: being publicly (and correctly) tagged as a loser. 

And so, naturally enough, he continues to deny that he lost in 2020. He might even believe it.

So let’s turn to Harris. What exactly is the Harris theory of the race? It is that Trump is bad. Combine that with the insight (which is to say none) of a San Francisco progressive in a one party state and you have the Harris campaign. 

This should not be taken as a criticism of the campaign managers. Trump for instance, has real professionals advising him. He just ignores them. I mean how hard can it be to focus on the issues the voters care about in survey after survey? Immigration, the state of the economy, crime.   Last I checked, Haitian immigrants eating pets was not at the top of the list. Neither was crowd size at rallies. 

Well let’s take a look at the Harris campaign. She too has pretty smart advisors. Her problem is that she listened to them, probably out of necessity. And so she is running a repeat of the Biden basement campaign. The underlying idea is that if she can keep away from a turned-on microphone or camera where she has to say something substantive, she may be able to hold on until election day, counting on Trump to deliver a generic Democratic victory.  

And therein lies the rub. Harris is utterly incapable of saying anything even remotely sensible unless it is already on a teleprompter in a controlled environment. Even when she is being questioned by friendlies in one of her infrequent interviews every answer quickly turns into a meaningless word salad. And the public is beginning to notice. (Not that Trump is coherent, but he is speaking to a different audience.)

So where does that leave us? According to the conventional wisdom, 7 battleground states will determine the winner. In the west we have Arizona and Nevada; In the South are  Georgia and North Carolina, and in the “Blue Wall” Midwest we have Pennsylvania, Michigan and Wisconsin. 

Election analysts and pollsters are busy trying to guess which states will wind up in which column after all the votes are counted. But maybe they are asking the wrong question. The right question to ask may not be about individual states. The right question may be: to what extent are the votes in those battleground states likely to be correlated? To the extent that the battleground states have voters whose preferences are highly correlated, the ultimate winner may win anywhere from 5 to 7 of the contested states. That would make the contest much less of a nail biter come election day.     

So what would be the factor that would account for the potential correlation of the voters, especially from different sections of the country? The underlying issue is whose judgement do the voters trust, or better yet, whose judgement do they distrust the least? 

Kamala Harris faces several difficulties here. First, she is the sitting Vice President. The last time a sitting Vice-President won the White House was  in 1988 when George H.W. Bush beat Michael Dukakis. Before Bush, the last sitting VP to be elected President was Martin Van Buren back in 1836. Also take note: Bush served as VP under Ronald Reagan, who was very popular. Unlike Joe Biden. 

The second difficulty Harris faces is that in order to win she has to hold together a fractious coalition whose members face each other with daggers drawn. Democratic elites are becoming progressively less enamored with Israel’s conduct of its war against Iran and its acolytes.  This is especially dangerous for Harris because it will make it extremely difficult for her to carry both Pennsylvania and Michigan, which are Blue Wall states, and vital to her chances. (Dearborn Michigan has the largest  Muslim population in the U.S., and that population, normally Democratic, has vociferously attacked the Biden Administration over its handing of the Israeli — Gaza war.)

The third difficulty Harris faces is that the votes of the Blue Wall states may be highly correlated—and correlated with other battleground states. Michigan, Pennsylvania and Wisconsin are 75% – 80% white. They are slightly older than the nation as a whole. Most importantly, whites without college degrees cast about ⅗ of the votes in Wisconsin and about half in Michigan and Pennsylvania. And whites without a college degree are a core constituency of the modern Trumpified GOP. Especially men without a college degree.

Finally, Harris has to make the argument that she represents change. And to do that she must create a sense of trust with the voters. This, she has conspicuously failed to do. In fact, it may be the fatal flaw of the Basement Campaign strategy.  How do you develop a bond of trust with the voters when you are hiding from them? In the end the voters are liable to decide to go with “the devil you know”. They know Trump; they don’t know Harris. So when the late deciders begin to break, which should be about now, my guess is that they will go with Trump. And send him to the White House. Again.

Just for the record. I am not rooting for either one of them. I have already voted for Nikki Haley. 

JFB

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The Battle of the Idiots continues. In it, Kamala Harris has her second sit down interview with a reporter since she secured the Democratic nomination. It is, on Kamala Harris’s part, a cliché fest. A truly cringeworthy event. See below.

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Hands down, in Philadelphia’s presidential debate sponsored by ABC News, former President Donald Trump emerged as the clear loser. Serves him right. As usual he lied throughout the event, fell into the numerous traps Harris laid out for him, failed to challenge Harris’s share of whoppers and didn’t press her on her remarkably convenient set of implied policy changes. 

He didn’t ask why the sudden change of heart on fracking.   Nor did he point out that in 2019 she opposed allowing citizens to purchase private health insurance. He didn’t call her out on her support for using taxpayer dollars to fund trans surgeries for migrant inmates. He also allowed her to dodge the question of whether she would support any restrictions on abortion. And not to put too fine a point on Trump’s strategic incompetence, he actually allowed Harris to put him on the defensive over our chaotic withdrawal from Afghanistan.   

The list of missed opportunities is almost endless. Instead of things that matter, Trump wallowed in his personal grievances, and produced the usual lies and wild exaggerations. And speaking of wild hyperbole, we learned that Trump is concerned that (illegal?) immigrants in Ohio are eating citizens’ pets. And that crime everywhere is the world is down except here in the United States where it continues to rise, presumably because other countries send their criminals to America to ply their trade. 

A time-series chart produced by the data firm Statista shows what nonsense this is. (See below). The U.S. does have a much higher murder rate than Europe, for instance. But it has been much higher than Europe’s rate for at least 20 years. And—wait for it—when did the US rate explode to the upside? That would be around 2019—well before the Covid-19 pandemic hit and when none other than Donald Trump was president. Hmm. 

But let’s not go down a rabbit hole while trying to illustrate the obvious, namely that Donald Trump is a serial liar. Strategically speaking the important question to ask is this: was Trump just making up stuff as he went along or was he actually trying to accomplish something?   Well, if his goal was to remind educated voters what they don’t like about him (actually why they detest him) he can claim the night was a stunning success. 

But does it matter? Will it have any impact on the election results? That is really hard to say. I am reminded of the time in the early 1970s that Henry Kissinger asked Chinese premiere Zhou Enlai whether he thought the French Revolution was a success. “Too early to say” Zhou reportedly replied. And so it is with the schoolyard brawl we call a debate. 

By all accounts the number of people who have not made up their minds about either of the two major party candidates is vanishingly small. The majority opinion among the electorate seems to be disgust, which is a testament to the good sense of the voting public. It is unlikely that partisans of either side will be persuaded to change their opinions. The vote of Manhattan’s Upper West Side is not in doubt. 

What really matters is the impact on what we charitably call low information voters. Trump appears to have an edge in these voters. They tend to show up in presidential election years, but not off years. So the question is: in what numbers do they show up to vote? And where do they show up? If they turnout in large numbers in rural areas, they would advantage Trump. If, on the other hand, Trump succeeded in losing more suburban women (a real possibility) or if Kamala Harris’s demeanor was reassuring to the remaining small contingent of undecided voters, then it would be advantage Harris. 

The Trump campaign is (predictably and with some justification) already whining about how the moderators treated their man. But when you complain about the ref, it means you are losing the game and you know it. 

The net of it is that in terms of style Harris won the debate, walking away.  In terms of substance—there wasn’t any to speak of. No surprise there. But keep in mind that polling indicates an extraordinarily tight race. A few thousand votes could matter in swing states. Will the debate change enough votes, or increase turnout on the margin where it matters? As Zhou Enlai said, It’s too early to tell. 

JFB

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