Colorado Dark

  It is called Colorado’s last boom town. Ten thousand people stampeded into Creede in the late 1800s in search of the silver hidden within the San Juan Mountains. The town was the epitome of the Wild West, a hangout for outlaws and conmen. But more than the shoot-outs and gamblers, it was the mines that made Creede. For nearly 100 years its prosperity was tied to the price of silver. The town’s last mine closed in 1985 and only about 300 people remain. Ghost towns and the creaky remnants of old mining camps litter the mountains. Now environmentalists and residents are looking to another sparkly resource to revive the economy: the stars.

Headwaters Alliance, a local non-profit organisation, wants to create a “dark-sky reserve” in aptly named Mineral County, which includes Creede. The campaign is not unique to southern Colorado. Dark-sky communities are cropping up around the American West. The International Dark-Sky Association (ida), based in Tucson, wants towns to curb their light pollution, which harms nocturnal wildlife and obscures the stars. The ida has certified more than 130 dark-sky places globally since 2001; 14 of them are in Colorado.

From the Economist

Quantitative Easing

Former Treasury Secretary Larry Summers’ August 26 op-ed in the Washington Post is an excellent commentary of the Federal Reserve’s policy of “quantitative easing.”  Under quantitative easing, the Fed buys bonds, which keeps down interest rates and adds more money to the economy, greasing the wheels of commerce.  Summers says that this was necessary during the financial crisis of 2008 and during the first shock of the Covid crisis in 2020, but not now.  Quantitative easing tends to benefit the wealthy, pushing the stock market and other asset prices, like homes, higher, but not doing much for regular people. 

Furthermore, because of the way Fed borrowing works, quantitative easing tends to shorten the term of the debt.  Summers says that with interest rates so low at present, the Fed and Treasury should be financing long term debt, locking in the current low interest rates.  Summers is not convinced that interest rates will stay low forever.  Inflation is a bigger threat than the Fed currently acknowledges. 

Summers warns that the Fed has followed the course of quantitative easing without examining where it is going.  He fears that following the easy path of the status quo will lead us into a financial quagmire similar to the way our continuation of unexamined policies led eventually to disasters in Vietnam and Afghanistan. 

I think that Summers is right on.  But Wall Street and most people love quantitative easing because it is good for almost everyone in the short term, just better for the rich.  However, the question is whether there is a problem in the longer term.  While inflation is the immediate concern, there might be other disruptions of the market, a stock market crash, or problems in the labor market, or failure of supply chains for food and other daily needs.  It’s also possible that nothing bad will happen.  We are in uncharted territory by letting quantitative easing and “easy money” run so long. 

China is tightening up its financial markets.  Most people think this is political, to reign in the power the Chinese billionaires vis-à-vis the government.  I think the Chinese may also be worried about dislocations in their economy.  They may think that tightening up now may prevent worse consequences in the future.  If so, I share their concerns.  I wish the Fed did, too.  I think Larry Summers does. 

 

Vietnamese and Afghan Refugees

I have had two brushes with Vietnam during my life: one was serving in the Army artillery in Vietnam during the war, the second was overseeing databases of Vietnamese who wanted to go to the United States after the war. 

When I was in Vietnam from 1969 to 1970, I had very little interaction with the Vietnamese. I was in a heavy artillery battery that supported American Army soldiers on the ground.  Most of the time we were stationed at firebases in the middle of nowhere, with no Vietnamese around.  A few times we had Vietnamese units on the same firebase, but we did not interact.  They supported Vietnamese units and we supported American units.  We were in northern South Vietnam, which the Army called I Corps.  Occasionally I would ride into town with supply trucks; so, I occasionally saw Hue and Quang Tri. At Firebase Barbara, on a lonely mountaintop not too far south of Khe Sanh on the Laotian border, all of our resupply was done by helicopter.  When Saigon fell, I had no personal connection to any South Vietnamese left behind. 

At the American Embassy in Bangkok, Thailand, from 1984 to 1986, I was in charge of the embassy’s computers.  I was primarily responsible for the computers in the embassy, which mainly handled administrative tasks like maintaining personnel and financial records.  However, as the senior computer person in the embassy, I had oversight responsibility for several other computer operations.  One of them handled data for the Orderly Departure Program for Vietnamese still in Vietnam who wanted to leave the country.  The Orderly Departure Program had been established to try to stop the dangerous exodus of Vietnamese “boat people.” Another handled data for Vietnamese refugees who had already escaped across Laos or Cambodia to Thai refugee camps and who wanted to go to the United States.  This was about ten years after the fall of Saigon, but I don’t know how many of these people had worked for the US during the war. 

According to Wikipedia, from 1980 to 1997, 623,509 Vietnamese were resettled abroad under the Orderly Departure Program, of whom 458,367 went to the United States.  As I recall, a friend at the embassy in Bangkok who worked in the Orderly Departure Program went to Vietnam about once a week to process a planeload of Vietnamese going to the US.  Outside of the Orderly Departure Program, the number of “boat people” leaving Vietnam and arriving safely in another country totaled almost 800,000 between 1975 and 1995.  The UN High Commissioner for Refugees estimated that between 200,000 and 400,000 boat people died at sea without reaching their destination.  About 40,000 Vietnamese refugees were held in Thai border refugee camps until they could be resettled. 

If Vietnam is an example, there will continue to be many refugees fleeing Afghanistan for years to come. 

 

Covid and the Stock Market

Mohamed El-Erian’s opinion piece on Bloomberg says it will take a huge shock to deter risk-taking investors.  He cites five mantras that stock traders have followed over the years:

·       Never fight the Fed.

·       The trend is your friend.

·       There is no alternative.

·       Fear of missing out.

·       Buy the dip.

For me, the first one is the most significant, “Never fight the Fed.” The Fed has become more and more important over the years. When inflation, which had started under Nixon, took off under Jimmy Carter, Fed Chair Paul Volker inflicted painfully high interest rates that got it under control.  Previously at Treasury, Volker had been instrumental in making Nixon’s decision take the US off of the gold standard work without destroying the US or the world economy. 

Fed Chair Greenspan was famous for holding up the stock market with the “Greenspan put,” named for a market option trade that enables an investor to avoid losses on a stock that goes down.  He was tested by the 1987 stock market crash just a few months after he was nominated to succeed Paul Volker.  He presided over a second crash, the dot.com bubble of 2000, and he was Fed Chair during the 9/11/2001 World Trade Center attack, which was a huge blow to Wall Street. 

Ben Bernanke was Fed Chair when the housing crisis hit in 2008, which threatened to bring down many of Wall Street’s most famous banks.  In the end, thanks to Bernanke, Treasury Secretary Paulson, and others at the Fed and Treasury, only one major bank failed, Lehman Brothers. 

When the Covid-19 lockdown crisis hit, Fed Chair Powell reacted even more strongly than Bernanke had.  Although many of the Fed measures to fight the 2008 crisis were still in place, Powell opened the flood gates of liquidity even wider, flooding the financial world with cash. 

The Fed “put” still exists and is more powerful today than it was in Greenspan’s day, justifying the maxim, “Never fight the Fed.”   The “put” has a double sided effect of keeping the US out of recession, but also magnifying inequality by enriching stock market investors.  This is a larger group that it was in previous generations, but still by no means includes everyone, and does not benefit investors equally.  It clearly favors the richest investors.  It subsidizes the rich to prevent the economy from collapsing for everyone. 

El-Erian mentions a phenomenon that has existed mainly since the the 2008 housing crash: low interest rates and bond yields.  People are buying stocks because bonds are such a bad deal.  Bond prices go down when interest rates go up.  There is no way for interest rates to go but up from here, and that means there is nowhere for bond prices to go but down. 

Interest rates are low for several reasons, but the main one is that the Fed buys them all as soon as they are issued by the Treasury.  If there is  no demand for bonds the interest rate goes up.  The Feds “quantitative easing” policy of buying bonds like crazy means that there is no reason for rates to go up because the Fed buys so many bonds quickly, no matter what the interest rate is, thus preventing the normal bond market from operating for normal investors. This is a global phenomenon because almost all central banks, particularly in Europe, have programs similar to the Fed’s “quantitative easing” resulting in negative interest rates in some countries, where banks charge you for holding your money instead of paying you interest. 

The loss of the bond market as an alternative to the stock market has meant that the stock market has risen even faster than in the past because of another of El-Erian’s maxims:  “There is no alternative.”  This is illustrated by the fact that the market has risen so much even as the Covid pandemic has played havoc with the economy.  Most recently the US suffered one if its most embarrassing defeats in Afghanistan in the last few days, but the defeat has almost no effect on market optimism.  The world may see the US as incompetent, weak and vulnerable, but investors see it as strong and vibrant. 

US investors have turned against China in recent days because it has cracked down and restricted many of its most famous high-tech companies.  They see this as a Chinese turn away from innovation toward more repressive government control.  There is an element of this, but I think China may be reacting to what it sees as excesses in the world financial markets, and is trying to limit this excess in China.  If this is the case, then I think it is good thing.  I worry that the excessive optimism in the US markets may be leading to a fall at some point, but I thought we would have seen something crack long before now. 

Finally, I think the US needs to repair its infrastructure, but I am not sure that now is the best time to do it.  We have spent like drunken sailors since the Covid crisis, running up the most debt since World War II.  I think this may be an overreaction.  Covid has killed many, but mainly it has killed older people, while war mostly kills people in their 20s, some of their most productive years; so, there is less of an effect on the economy.  Despite the fact that the damage to the economy was not as great as a war, the US government borrowed as if it were.  The borrowing was encouraged by the new, trendy idea that deficits don’t matter.  For some reason the economists have decided that governments never have to pay off their debts and so it doesn’t matter how much debt they have.  I don’t believe this idea.  I think someday interest rates will go up and it will become very expensive to pay off a gigantic federal debt.  Therefore, I don’t think this is the best time to start a very expensive infrastructure project.  It is as if you had just gotten out of the hospital with big medical bills and when you got home said, “Now is the time to build that new swimming pool we’ve been talking about for years.”  You should spend on big projects when you don’t have extra bills, like we have for the Covid stimulus.  We should get our house in order first.  We can always spend on essentials, like repairing bridges before they fall down, but we shouldn’t take on big, new projects now.