Author: j.giglio

Prime Minister Trudeau went too far in dealing with Canada’s ‘Freedom Convoy’

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The “Freedom Convoy” of trucks that converged in Ottawa on Jan. 28 began in response to the Canadian government’s requirement that Canadian truck drivers crossing the U.S. border be fully vaccinated to avoid testing and quarantine requirements upon their return. Then it evolved into a protest against all public health measures aimed at fighting the COVID-19 pandemic.

Organizers said they would not end their protest until all pandemic-related public health measures were dropped.

After three weeks of protests, Prime Minister Justin Trudeau invoked the Emergency Act to deal with the blockades. It was the first time the law had ever been used, and it was invoked even though there were plenty of other laws on the books to deal with peaceful protests. It was a classic example of using a machete when a scalpel would have worked just fine.

The Act gave the Canadian government broad powers to restore order, ranging from placing significant limits on peaceful assembly, to prohibiting travel, to requiring financial institutions to turn over personal financial information to the Canadian Security Intelligence Service and freezing the bank accounts of protestors and anyone who helped them.

The Act also gave the government broad authority over businesses, such as dragooning private tow truck companies to provide services against their will. Insurance companies were required to revoke insurance on any vehicles used in blockades.

The Emergency Act is only supposed to be invoked in a genuine crisis, such as in wartime. The War Measures Act, its predecessor, was last invoked under the current prime minister’s father, Pierre Trudeau, in response to the 1970 October Crisis, when a group of militant separatists who wanted to create an independent socialist Quebec engaged in numerous bombings and kidnapped and murdered a cabinet minister.

There is a very real difference between invoking a law against violent terrorists using it to combat a largely peaceful protest by Canadian citizens tired of COVID-19 restrictions and lockdowns.

Riot gear-clad Ottawa police, with provincial and federal help, towed dozens of vehicles that were blocking Ottawa’s downtown streets, retaking control of the area around Parliament buildings, and using pepper spray and stun grenades to remove demonstrators. Ottawa’s streets are now back to normal; there is only snow and silence in the country’s capital.

All this could have been done under existing law. As Alberta Premier Jason Kenney put it, “We have all the legal tools and operational resources required to maintain order.” Put simply, the prime minister could have restored and maintained public order without marginalizing substantial segments of the population.

Trudeau, born and bred elite, first described the truckers as a fringe minority who held “unacceptable” racist and misogynist views. He refused to meet the protesters or negotiate with them, and he was not interested in hearing about the mandates’ impact on their lives. Many of these truckers had spent the last two years keeping the supply chain running.

Instead of finding ways to defuse the situation, Mr. Trudeau issued the emergency order, which he called a “last resort.” After a conservative member of Parliament and descendant of Holocaust survivors asked him tough questions about his handling of the truckers’ protest, Trudeau denounced conservatives who “stand with people who wave swastikas and confederate flags.” These comments came from someone who spent his youth wearing blackface.

The role of government is to maintain public order while respecting civil liberties, including the right to peaceful assembly. Many protests are disruptive and often unlawful, so it is reasonable to impose limits on the right to assemble.

But a real leader and statesperson would have gone to the protesters and said: “I’m here. What do you want to say?” Seeking out and meeting with protesters and pursuing dialogue is a far more strategic way to restore the rule of law than imposing martial law.

Debt matters as U.S. deals with highest inflation rate in 40 years

Posted on by j.giglio

The United States’ total public debt has ballooned to nearly $30 trillion. Split among the nation’s roughly 130 million households, that is about $229,000 per household. And the bill is about to go up, as rampant inflation triggers rising interest rates.

Few in the media took notice when the nation’s debt hit the $30 trillion mark. There was little if any reaction from the denizens of D.C.’s political and policy establishment, busy as they are fighting over just about everything. Budget hawks are nowhere to be found.

Setting aside the intergovernmental debt that one part of the government owes to another part, such as what the federal government owes the Social Security Trust fund, debt held by the public is about $24 trillion. That is more than GDP, a level previously seen only at the end of World War II.

Much of the national debt owed to foreign institutions is held by the Japanese and the Chinese, who definitely want to get paid. It should not be overlooked that a growing debt burden may undermine confidence in the U.S. dollar as the world’s reserve currency, making it more difficult to finance economic activity in international markets.

But why worry about debt when vast sums of money can be created out of thin air to pay the interest on all that debt, and nominal interest rates are near zero? It’s a free lunch!

The federal government spends about $300 billion annually on interest payments on the national debt. This is the equivalent of nearly 9 percent of annual federal revenue, and more than the federal government spends on science, space, technology, transportation and education combined.

The cost of servicing debt from past spending reduces the money available for other spending programs.  Each 1 percent rise in interest rates would increase debt servicing costs by about $225 billion at today’s debt levels. This is not chopped liver.

Even in an historically low interest rate environment, the amount of debt we’ve accumulated results in daunting interest costs. It will get even more expensive when the Federal Reserve gets around to raising interest rates significantly to deal with the highest inflation in 40 years.

Who would have thought trillions in stimulus spending and money being printed by the nominally independent Federal Reserve and plowed back into the economy when companies couldn’t produce enough of what consumers wanted would drive prices higher?  More demand plus less supply equals higher prices. The Fed ignored the inflation risks inherent in monetary financing of the government deficits. After all, there is virtually no limit to money creation under a fiat monetary system.

The hard truth is that these folks were out to lunch as the cost of living for ordinary Americans was rising. Paychecks will feel tighter than usual as inflation outpaces wage increases.

Americans are then told that a key way to help relieve rising prices is to pass a $1.85 trillion collection of spending programs and tax cuts known as the Build Back Better bill, which is currently languishing in the Senate. It will deliver good economic outcomes: low inflation and low unemployment.

And now financial markets are nervous about the prospect of the steepest monetary tightening cycle since the 1990s, with markets pricing in more than five quarter-point Federal Reserve interest rate hikes in 2022.

Debt matters. Fiscal responsibility matters. The short-term pain associated with fixes that will bring long-term gains is a real challenge for politicians – especially in even-numbered years. They much prefer to kick the can down the road hoping the bill will come due on someone else’s watch.

The American public is equally culpable, electing politicians who don’t have the courage to advocate for solutions to the debt issue. Those who do are run out of office.

To paraphrase Hemingway’s words from “The Sun Also Rises,” “How do you go bankrupt? Two ways: gradually, then suddenly.”

Traditional conglomerates such as GE, J&J and Toshiba are moving in a new direction

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Last November, three major conglomerates – General Electric, Johnson & Johnson, and Toshiba – all revealed plans to break themselves up in an effort to maximize shareholder value. They won’t be the last to do it.

Conglomerates are large parent companies made up of smaller business units that operate across multiple markets in an effort to diversify the risk of being in a single market. The financial health of a conglomerate is difficult to discern, as the parent company reports results on a consolidated basis. Recall the key role GE Capital played for many years as the catalyst for growth and profitability at General Electric.

Johnson & Johnson (J&J), the biggest pharmaceutical company in the U.S. based on market cap of $435 billion, announced its intent to break off its consumer health division in the next 18 to 24 months. J&J is the 36th largest company in the U.S. based on total revenue, according to the 2021 Fortune 500 list.

It will spin off its consumer business, which includes such brands as Band-Aid, Tylenol, Nicorette, and Neutrogena, into a new publicly traded company by November 2023. Its prescription drug and medical device businesses will continue to operate under its banner.

What is behind these break-ups? There is an argument that these firms have all become too diversified, complicated and grown too challenging to manage efficiently.

The recent history of all three has also been tumultuous. General Electric was nearly taken down during the financial meltdown in 2008. J&J is facing over 20,000 lawsuits related to claims that its baby powder causes cancer and for its role in the opioid crisis. The firm took a hit when the Centers for Disease Control and Prevention recommended that Americans not receive its COVID vaccine because of adverse side effects. Toshiba is still trying to recover from a massive 2015 accounting scandal.

A different approach for Amazon, Facebook, Microsoft and Apple

At first blush it would appear that the era of the conglomerate and the notion that brilliant management can successfully run businesses in varied industries is over. While traditional industrial corporate conglomerates may be pushing up daises, the success of tech giants such as Amazon, Facebook (parent Meta), Microsoft, Apple, and Alphabet as modern-day conglomerates should be noted.

These firms are not throwbacks to the traditional conglomerate model whose main purpose was to allocate financial capital across various businesses and rebalance the portfolio through acquisitions and divestments.

Take Amazon for example. While the company does not describe itself as a conglomerate, it operates online and brick-and-mortar retail stores, sells outsourced computing services, runs global logistics operation, produces movies, and the beat goes on.

These tech conglomerates do differ from traditional industrial conglomerates. They have created platforms that knit together and support the varied businesses. Put differently, the businesses in these companies rely on a common infrastructure to provide the unifying thread.

A platform is essentially a marketplace that connects the supply side and the demand side. Amazon links shoppers and sellers, producers and consumers in high value exchanges. The company enables Prime members to order Whole Food deliveries on the Amazon website.

The spectacular growth of these businesses has been explained by network effects. The value of a platform depends in large part on the number of users on either side of the exchange. The more users a platform has, the more attractive it becomes, leading even more people to use it. This allows business to scale up quickly and creates a competitive advantage. The tech companies are exploiting the power of platforms and the relatively low capital investment they require. These network effects are the driving force behind every successful platform.

Once the most valuable company in the world, GE is making dramatic moves to survive

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General Electric (GE), the iconic American corporation that says it brings good things to life, announced in November that it is splitting into three public companies. The firm hopes to focus and simplify its business while reducing its debt.

One of the three new companies will focus on aviation, another on health care, and the third on energy.  GE plans to spin off its health care division, which makes hospital equipment, in early 2023. The following year, it intends to combine its power units and renewable energy unit, which makes turbines for power plants and wind farms, leaving only the aviation business.

The firm will then focus on making and servicing jet engines. Existing GE shareholders will get stakes in each of the new public companies.

This is certainly a dramatic move for the 129-year-old industrial conglomerate. The company started in 1892, after the company, which was of course founded by Thomas Edison, inventor of the light bulb, merged with its rival manufacturing company Thomson-Houston Co. to become General Electric, as it is known today. A few years later the company became one of only 12 companies listed on the newly formed Dow Jones Industrial Average.

During the 1980s and 90s, the firm was run for 20 years by the larger than life Jack Welch. He transformed the manufacturer into a conglomerate, buying up companies, including RCA, owner of the NBC TV network.

At its height, under Welch, GE had expanded into the financial sector and was making everything from refrigerators and plane engines to medical equipment and, of course, light bulbs. It became the most valuable company in the world.

But GE’s problems didn’t come out of the blue. There were many factors involved in its demise. One was Welch’s focus on GE Capital, the firm’s financial services arm. In 2000, the lion’s share of GE’s profitability and almost half its revenue came from GE Capital.

During Welch’s tenure, it became far larger and more successful than GE’s other business units. At its height, GE Capital was the seventh-largest US financial institution. GE Capital enabled the company to smooth over its quarterly earnings report and keep Wall Street happy.

GE Capital moved into retail banking, private label credit cards, brokerage services, home loans, mortgage-backed securities, and insurance. It had also become the world’s largest lessor of cars, equipment, and ship containers, and the biggest private mortgage insurer.

In effect, GE, a household name and established global brand, was more of a financial services company than an industrial manufacturing company making stuff the economy needs. This finance arm was a major factor in GE’s demise. In some ways, GE Capital was the tail wagging the dog.

All hell broke loose when the financial crisis hit in 2008, and GE barely survived, as the crisis revealed it to be overstretched. Despite GE’s reputation for management excellence, the firm was overly dependent on its finance business, which melted under the heat of the excessive risks it had taken during a period of low interest rates and a long bull market. With GE struggling to meet is financial commitments, Warren Buffet’s Berkshire Hathaway, Inc. famously stepped in and invested $3 billion.

The American taxpayer guaranteed tens of billions in debt. The U.S. government designated GE Capital a systemically important financial institution, meaning that it had the potential to wreck the economy if it were to collapse (too big to fail).

So much for the myth that Jack Welch was the greatest manager of the 20th century, elevating management to a kind of science, and for the belief that great management can work miracles. GE was supposedly the textbook case of a corporation creating synergy and value across various companies around the world. Soon, you will barely be able to recognize it.

Another ugly inflation report is cause for worry for working Americans

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After yet another ugly inflation report, the United States has its highest inflation rate since 1982, an eye-popping 6.8%. It was an increase that surpassed anything even the most pessimistic forecasters expected.

Inflation is up almost a whole percentage point in a single month and is three times the Fed target of 2%. It may climb higher still before it starts to come under control.

Inflation has become impossible to ignore. Working people are struggling to meet the cost of basics like food and housing because of skyrocketing prices. In November, food prices were up 6.1% from the year before, with meat, poultry fish and eggs up 12.8%, cereals and bakery products were up 4.6% and non-alcoholic beverages up 5.3%. Energy prices increased 33%. Used trucks and vehicles went up 31.4%.

All these items are basic necessities. Working Americans have had trouble this year affording basic needs amid soaring inflation.

Is it any wonder why the ordinary working American is anxious when they go to the grocery store or gas station? Basic necessities have become unaffordable for many middle- and low-income families whose salaries have not kept up with inflation. Ignoring these numbers is like going to the Grand Canyon and keeping your eyes shut.

The Federal Reserve, after having been caught flat-footed, is now struggling to get ahead of inflation.  After nearly a year of insisting that inflation is transitory, the Fed finally acknowledged otherwise. It will cut back its stimulus program more quickly than planned, ending asset purchases by March and raising interest rates as much as 75 basis points by the end of 2022.

That word “transitory” has been put to pasture as the Fed gradually tightens monetary policy to put the economy on a smooth glide path back to a growth and inflation equilibrium, and the promised land.  Good luck with that.

The Fed’s hawkish pivot comes as the economy faces the fastest inflation since the 1980s and a tight labor market. The Fed made a historic mistake that they now have to fix by slamming on the brakes without sending the economy into recession. Prices rise when goods become scarce or the money supply expands rapidly.

For sure, pandemic-induced supply chain disruptions have caused scarcity, but the Fed increased the money supply more than 40 percent in the past two years, creating excess demand that has contributed to inflation. Say what you want about inflation, and everybody does, today’s version is an unusual combination of both the demand and supply side.

Stopping inflation is a slow and painful experience for ordinary working-class Americans. Inflation may become self-perpetuating through price and wage-setting behavior. American workers will demand higher wages to compensate for inflation, and firms will raise prices, creating a vicious cycle. It eats away at consumer purchasing power and has historically required crushing interest rates to bring it under control.

Anyone whose pay is not rising by at least 7% will, in effect, feel like their pay has been cut. Inflation is now America’s public enemy number one.

It should be clear as gin that the pay hikes the country is seeing for workers traditionally at the lower end of the pay spectrum are long overdue after decades of stagnation. But higher wages are only meaningful if working Americans can afford more as a result. Next year’s price surges threaten to cancel out bigger paychecks as working people will be paying more for less.

Pearl Harbor Day is a day that should live in infamy

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Early in 1941, the government of resource-poor Japan realized that it needed to seize control of the petroleum and other raw material sources in the Dutch East Indies, French Indochina and the Malay Peninsula. Doing that would require neutralizing the threat posed by the U.S. Navy’s Pacific Fleet based at Pearl Harbor in Hawaii.

The government assigned this task to the Imperial Navy, whose combined fleet was headed by Admiral Isoroku Yamamoto. The Imperial Navy had two strategic alternatives for neutralizing the U.S. Pacific Fleet. One was to cripple the fleet itself through a direct attack on its warships, or cripple Pearl Harbor’s ability to function as the fleet’s forward base in the Pacific.

Crippling the U.S. fleet would require disabling the eight battleships that made up the fleet’s traditional battle line. It was quite a tall order.

The most effective way to cripple Pearl Harbor’s ability to function as a naval base would be to destroy its fuel storage and ship repair facilities. Without them, the Pacific Fleet would have to return to the U.S., where it could no longer deter Japanese military expansion in the region during the year or so it would take to rebuild Pearl Harbor.

It soon became apparent that the basics of either strategy could be carried out through a surprise air raid launched from the Imperial Navy’s six first-line aircraft carriers. Admiral Yamamoto had a reputation as an expert poker player, gained during his years of study at Harvard and as an Imperial Navy naval attaché in Washington. He decided to attack the U.S. warships that were moored each weekend in Pearl Harbor. But in this case the expert poker player picked the wrong target.

The Imperial Navy’s model for everything it did was the British Royal Navy. Standard histories of the Royal Navy emphasized its victories in spectacular naval battles.

Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. So it was that, in one of history’s finest displays of tactical management, six of the world’s best aircraft carriers furtively approached the Hawaiian Islands from the north just before dawn that fateful Sunday, Dec. 7, 1941, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion. On paper at least, this rivaled the British Royal Navy’s triumph at Trafalgar.

But so what?

The American battleships at Pearl Harbor were slow-moving antiques from the World War I era. As we know, the U.S. Navy already had two brand new battleships in its Atlantic Fleet that could run rings around them. And eight new ones the navy was building were even better.

More importantly, the Pacific Fleet’s three aircraft carriers weren’t at Pearl Harbor. American shipyards were already building 10 modern carriers whose planes would later devastate Imperial Navy forces in the air/sea battles of the Philippine Sea and Leyte Gulf.

Most importantly, as the sun set on Dec. 7 and the U.S. Navy gathered the bodies of its 2,117 sailors and Marines killed that day, all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing Pearl Harbor to continue as a forward base for American naval power in the Pacific.

So in reality, Dec. 7 marked the sunset of Japan’s extravagant ambitions to dominate Asia. Admiral Yamamoto and the Imperial Navy’s other tradition-bound leaders chose the wrong targets at Pearl Harbor.

The dictates of tradition are usually the worst guides to follow when it comes doing anything really important. After all, if they survived long enough to be venerated, they’re probably obsolete.

It’s time to hold social media accountable for what appears on their platforms

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Large social media platforms such as Alphabet (Google), Facebook (now Meta) and Twitter like having it both ways when it comes to taking responsibility for the content on their platforms.

On one hand, they say they are merely platforms for people who post content, and as platform providers are not responsible for what appears. On the other hand (isn’t there always), they actively determine what appears on their platforms, in the same way newspapers decide what stories to run.

Can social media platforms really say with a straight face that they are not responsible for what appears on their platforms when they determine what constitutes suitable content?

Internet social media platforms are granted broad safe harbor protections against legal liability for any content users post on their platforms. The arguments these platforms make for escaping legal liability are spelled out in one sentence in Section 230 of the 1996 Communications Decency Act: “No provider of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In essence, Section 230 gives websites immunity from liability for what their users post.

As Congress considers amending or repealing Section 230, perhaps one immediate step should be to give the Federal Communications Commission oversight of the platforms’ content decisions.

The Communications Decency Act passed in 1996 when the Internet was in its infancy and Congress was concerned that subjecting hosting platforms to the same civil liability as all other businesses would retard their growth. It was written before Facebook and Google existed.

In effect, big tech companies benefit from a federal law that specifically protects them. The same sweetheart deal is not available to traditional media companies and publishers. When you grant platforms complete immunity for the content their users post, you also reduce their incentives to remove content that causes social harm.

Congress’s expectation in enacting Section 230 was at least two-fold. First, it hoped protection from civil suits would provide an incentive for websites to create a family-friendly online environment that would shield children, hence the Good Samaritan title of this section. Second, Congress hoped it would promote the growth of the fledgling Internet economy by giving it partial protection from federal and state regulation.

Fast forward 25 years and things look a whole lot different than they did in 1996. The Section 230 protections are now desperately out of date. The largest and most powerful companies today are big tech companies that have enormous resources and advanced algorithms they use to help them moderate content. It is time to rethink and revise the protections.

There is growing consensus for updating Section 230. Both Democrats and Republicans apparently agree that these companies should not receive this government subsidy free of any responsibility and that they should moderate content in a politically neutral manner to provide “a forum for a true diversity of political discourse”.  During his presidential campaign, President Biden said Section 230 should be “revoked, immediately.” Senator Lindsey Graham (R-SC) has said: “Section 230 as it exists today has got to give.”

Before amending Section 230, Congress should make sure that changing it won’t do more harm than good. While lawmakers argue about whether Section 230 should be amended or indeed repealed, one simple and immediate step toward making big tech companies more transparent would be to require them to submit to an external audit conducted by the Federal Communications Commission.

Such an approach is not perfect, of course, but it would force the network platform companies to have to prove that their algorithms and content-removal practices moderate content in a politically neutral manner, not partisan instruments and prioritize truthfulness and accuracy over user engagement.

This would be consistent with one of Congress’s findings when it enacted Section 230: “The Internet and other interactive computer services offer a forum for a true diversity of political discussion, unique opportunities for cultural development, and myriad avenues for intellectual activity.”

Sausage making and the President’s Build Back Better legislation

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The legislative process is rarely pretty in the best of times, never mind in times like these.  Many people console themselves with this reality by quoting Otto von Bismarck, the pragmatic Prussian politician who, among other things, was the first chancellor of the German Empire from 1871 to 1890.

He is often erroneously quoted as saying “Laws are like sausages.  It is best not to see them being made.”  There has been a lot of sausage making going on in full view at the White House and in Congress over the last several months on the President’s Build Back Better legislation.

When a big bill makes its way through Congress, it highlights political divisions and can seem disconnected from the average American’s life. The Biden administration’s quest for a legislatively viable version of its Build Back Better agenda is an example.

Several of the administration’s promises have been abandoned in the new package, such as free community college and instituting a clean electricity standard with penalties for utilities that don’t comply.  Senator Joe Manchin, D-West Virginia, kneecapped the provision to retire coal and natural gas plants.

Other programs that were initially going to be permanent will instead be set to expire in a year or two or five, like the expanded child tax credit and expanding Medicaid in the 12 states that have not already done so.  It merits noting that once entitlement programs are established, they are famously difficult to repeal.

Still, the $1.75 trillion package contains a wide-ranging set of programs such as universal preschool for all 3- and 4-year olds, subsidized child care that caps what parents pay at 7% of their income, expanded Medicare to cover the cost of hearing benefits, and expanded tax credits for 10 years for utility and residential clean energy to reduce pollution, including electric vehicles.  Also notable is that although an overwhelming majority of Americans favor government action like Medicare negotiating with drug companies to reduce drug prices, that policy in not in the proposed legislation.

While the White House claims the legislation would not add to the deficit because of tax increases on corporations and the affluent, finding the taxes to pay for this package is proving difficult.  For example, Sen. Kyrsten Sinema, D-Arizona, is opposed to increasing the corporate tax to 25% or 26% and raising personal income tax rates. The progressive wing of the Democratic Party is now proposing annual taxes on billionaires for unrealized capital gains on stocks that have not even been sold and received as income.

According to an analysis from the University of Pennsylvania’s Wharton School of Business, the proposed new taxes and tax increases to pay for the $1.75 trillion bill would raise nearly $470 billion less than the White House claims.

With the President out of the country, Democrats are arguing among themselves over the details of the legislation.  House progressives are adamant about requiring the bill to be a done deal before they will vote for the $1.2 trillion bipartisan infrastructure bill that has been passed by the Senate because they don’t trust moderate Democrats to keep their word.

As the late, great New York Yankee catcher Yogi Berra said: “It ain’t over till it’s over.” So, the public sausage making, also known as lawmaking, will continue on Capitol Hill over the President’s Build Back Better legislation. As always, the devil is in the details.

The fight over the federal debt ceiling is Kabuki theater. What is Kabuki theater, you ask?

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The United States is once again flirting with a default crisis. The clock is ticking on a deal to raise the federal borrowing limit, or debt ceiling, and prevent a default on the national debt. After months of wrangling, Congress struck a short-term deal to temporarily avoid a first-ever default, but it sets up another showdown in a matter of weeks.

The recent legislation raised the nation’s borrowing limit by $480 billion, the amount the Treasury Department said it needed to meet the country’s cash needs until Dec. 3, setting up yet another deadline for Congress to resolve the issue.

The debt ceiling, also known as the debt limit, is the maximum amount of money the feds can borrow cumulatively by issuing debt in the form of bonds to meet its obligations.

The fight over the federal debt ceiling is Kabuki theater in the city of sound and fury. Tracing its origins to the 17th century, Kabuki is the stylized Japanese drama in which performers wear elaborate make-up and costumes. Actions aren’t literal but metaphorical, conveyed through singing, dancing, and mime.

In Washington, D.C. the Kabuki theater of America’s debt ceiling is a debate with overheated rhetoric and extravagant gestures, as politicians of both parties engage in the silly debt ceiling dance until the 11th hour, when each gives ground to save face, resolves the standoff and avoids a default just in the nick of time.

A default would be a catastrophic blow to the economic recovery from the COVID-19 pandemic. Global financial markets would be disrupted, and Americans would pay for this default for generations, as global investors would come to believe that the federal government’s finances have been politicized and they are not going to get paid what they are owed. Going forward they would demand higher interest rates on the Treasury bonds they purchase.

Congress enacted the debt ceiling in 1917 to placate anti-war lawmakers who were uncomfortable about letting the Treasury Department borrow too much money to finance World War I. Since then, the limit has been raised or modified 98 times according to the Congressional Research Service. Yawn.

It’s a mechanism that allows the U.S. Treasury to borrow money for any approved spending up to a certain limit without first getting approval from Congress. Lifting the debt limit does not initiate any new spending. Rather, it simply allows the U.S. to finance obligations already authorized by Congress, including interest on the debt and payments to Social Security, Medicare, and Medicaid.

There have been regular congressional battles over the debt ceiling. Despite partisan disagreements, Congress and the President have never allowed the country to default on its debt. During the Obama administration in 2011, when Republicans refused to raise it without significant spending cuts, a deal was finally struck to resolve the debt ceiling issue.  But coming within days of the Treasury being unable to pay out certain benefits did lead to Standard & Poor’s to strip the U.S. of its triple-A credit rating for the first time in history.

There were also government shutdowns in 2013 and 2018, when the government closed non-essential services, such as national parks, and sent federal employees on forced leave.  President Trump’s demand for $5.7 billion to build a wall on the Southern border led to a 35-day shutdown in 2018.

If the debt ceiling is not raised and the government can’t borrow to pay the bills, it would have to suspend certain pension payments, withhold military and federal workers’ pay, and delay interest payments on outstanding debt, potentially roiling financial markets and raising borrowing costs.

But not to worry, Americans have seen this movie before. The debt ceiling will be raised, and the government will not default. After all the Sturm and Drang, all will be fine after Democrats and Republicans have used it to embarrass one another and seize some electoral advantage.

Federal Reserve is betting on inflation being transitory. We’ll see.

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In a highly anticipated announcement several weeks ago, Federal Reserve Chair Jerome Powell said the Fed would start reversing its pandemic stimulus programs. Removing the training wheels from the U.S. economy will likely begin as soon as November.

The Fed continues to believe that inflation, while painful, is transitory. This Panglossian scenario may turn out to be a pipe dream.

The Fed cut its short-term benchmark rate to near zero when the coronavirus hit in March 2020. The pandemic lockdown and subsequent recession led to ultra-loose monetary policies and massive asset purchases by the central bank aimed at keeping the economy from heading over a cliff.

Powell said the process of dialing back the government’s buying spree, or tapering, from buying $80 billion in Treasuries a month and $40 billion in mortgage-backed securities since June 2020 should be complete by mid-2022. He indicated that interest rates could start to rise again next year but stressed that the reduction of monthly asset purchases is not tantamount to hiking interest rates.

This move comes even though the Fed does not expect inflation, which is running at the highest rate in decades, to persist. The central bank has consistently contended that this year’s surge is transitory and inflation will soon be close to the Fed’s 2 percent target. Transitory has become a byword of pandemic-era central bank policymaking.

In August, overall consumer prices rose 5.3 percent compared to last year, a slightly slower pace than in June and July but high nonetheless. The Fed still sees core inflation, which excludes food and energy prices, running at 3.7 percent this year before falling to 2.3 percent in 2022 and 2.1 percent in each of the following two years.

The Fed is also cutting its economic growth projection for this year to 5.9 percent from a 7 percent growth forecast in June. It projects that unemployment will fall from the current 5.2 percent to 4.8 percent by year’s end.

It merits noting that a 2 percent inflation rate is still a big deal to everyday Americans. If realized, it would result in prices rising by 22 percent over a decade with no assurance that wages would match the increase.

Closely related, inflation makes life more complicated for savers and retirees living on a fixed income, since it erodes the purchasing power of every dollar, which is the equivalent of raising prices. Within living memory, the average price of a cup of coffee was 50 cents. Today it’s around $3.

The Fed appears to believe that relatively high inflation rates are a temporary phenomenon; prices are rising because of the pandemic and the production shortages that accompany it.

Put differently, the Fed anticipates that inflationary pressures such as spiking energy prices and global supply chain bottlenecks will eventually dissipate. It does acknowledge that factors that are contributing to the recent rise in inflation may last longer than originally projected.

Of course, there is no mention that massive monetary and fiscal stimulus over the past year and a half is contributing to inflation. The Fed continues to blame the supply side for inflation without recognizing that monetary policy is pushing the demand side when there is insufficient supply.

But not to worry, the Fed could be correct as it navigates the fog of uncertainty – but it could be wrong. How long is transitory? Will inflation simply go away on its own? One could conclude from the data that the economy has long been overheating and inflation may continue rising for the foreseeable future.

If that is the case, the Fed should snatch away the punch bowl right away. Realistically, it will not increase interest rates to deal with inflation until Americans are angry enough to vote for the opposition party next year. Then they will have to slam on the brakes by raising interest rates aggressively, and the country may well enter a period of stagflation reminiscent of the 1970s.