Podcast: Play in new window
- Politicians recognize C19 “cry for help” is their huge career opportunity
- Many furloughed employees making more than when working
- Will Corona virus finish the retail reckoning that Amazon started?
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
UBI: Money For Nothing & Your Checks For Free
May 20, 2020
David: COVID is an excuse for many things, and I think that we should be extra vigilant with any proposal that’s promoted in this context. You get higher social pressure, higher anxiety. Politicians and policy makers have always recognized the cry for help as a once in a career opportunity. Can we assume that dependency is, in fact, something that particular politicians prefer?
Now here are Kevin Orrick and David McAlvany:
Kevin: Welcome to the McAlvany Weekly commentary. I’m Kevin Orrick, along with David McAlvany. Everyone I’m talking to, Dave, seems to be experiencing similar patterns. Even though there’s a diversity of beliefs about COVID, about the loss of constitutional rights, about how we’re as sort of this herd mentality. We’ve talked about how hard it is to get a good night’s sleep, even though we’re sleeping hard, we’re hardly sleeping. And I’m just wondering if it’s a battle of tensions, a battle of various understandings of what the truth really is.
David: Oh, sure, and it depends on what your focus is. Is it herd mentality, or is it herd immunity? I mean, what are we what are we trying to get to? You’ve got different responses from let’s open it up and get back to normal or Bill de Blasio says, “If they’re swimmers in New York City beaches, I’m going to take him out of the water. I’m going to take them out of the water.” And you get a sense like, hmmm, that’s interesting. Why don’t you try?
Kevin: Yeah, well, you were talking about a scientific experiment that everybody was rejoicing over. And it turns out there were, what, eight subjects?
David: Yeah, part of the melt up dynamic on Monday of this week was Moderna’s experimental Coronavirus vaccine. And, you know, again, the market went into panic mode. Panic as in, we’re going to miss out. This is amazing. We’ve got to get back reinvested because the world is solved. Well, it turns out there’s only eight trial participants. Not exactly a scientific result if you’re looking for something to hang in a hopeful hat on. Maybe they’re going to make progress and expand the trials further. But a lot of interest in stocks on the basis of something that’s very, very thin.
Kevin: What I’m finding, Dave, and I find it in my own family. I see it in the company. I see it with people who I do zoom calls with, you know, men’s groups and get some of these things that we’ve continued to meet. There’s a non sequitur, and non sequitur is a word that I don’t use very often, but non sequitur means that you’re drawing logical conclusions from things that don’t logically connect. And where I’m at is this: I feel manipulated. I feel like I’m losing constitutional rights. I understand that I’m being herded in a way that I’m not amenable to. I see this with the whole world. But I also see that the reaction to that by some who see the same thing just going around and acting like there’s nothing wrong and they’re not changing any kind of their distancing or what have you.
Everybody’s got a study that confirms what they believe. The problem is you can’t solve one problem by the other. I mean COVID really does exist. Yet, we also seem to be losing a lot of our rights. That’s creating attention, but I wanted to bring up something that actually was the positive. Okay, one of the positives is, all right, right now, on Monday nights when we meet, you’re on your porch and I’m downstairs at my house and we do Facetime. You’re smoking your cigar. I think you had a nice rum last night. I had a Talisker, and actually we’re doing just fine that way. But each time, the last couple of weeks, while we’ve been talking, you were on your front porch and you’ll get distracted and you’ll wave and then we’ll talk a little more and you’ll get distracted and you’ll wave.
David: Well, this has been eight weeks of a neighborhood, which is largely professional and moving fast into the neighborhood, moving fast out of the neighborhood,
Kevin: You hardly know each other most of the time…
David: That’s very true. And all of a sudden the neighborhood is neighborly and people do wave and people stop at the top of your driveway and say hello and how are you doing and what’s going on? And I mean, I think a part of it is sort of a craving for human connection in a world where a lot of our normal connections have been altered. But it’s a really fascinating thing, and I think it’s healthy. I hope it doesn’t change. I hope it stays that way where you know half a dozen people go by and I didn’t know their names a year ago. There are only 80 homes in our community, but you know, it’s enough where I don’t know everybody. It’s refreshing to me to know Eric on a first name basis and know something about his family that I didn’t know before.
Kevin: There’s a forced humility on this because all of our artificial securities are being challenged. The nation’s run on artificial security based on debt and dollar supremacy. Ah, a lot of things. I mean oil price being high for that dollar supremacy. But, you know, the question would be, alright, now, how long should the lock down last?
David: Yeah, that’s a really good question. I don’t know that I have an answer. I love the Babylon Bee’s answer. For anyone who’s keen on satire, that’s where you can go sometimes if you’re wanting to explore smiles and laughter, Babylon Bee is a fun place to go. They say 68% say that locked down shouldn’t end until all diseases are eradicated, there is no war, hunger or suffering.
Kevin: Wow, that sounds like the answer that a beauty queen gives when they say what your goal for, you know, the future.
David: Yeah, but I’ve also heard, not in the Babylon Bee, but, lockdown shouldn’t end until Biden’s elected. That’s not satire, that’s a point of view. Not necessarily mine, but one that I thought was pretty funny.
Kevin: Okay, so I talked about this artificial security. It seems, and you’ve talked the last few weeks, that we’re fighting fire with the very fuel that caused the fire in the first place. Yet the financial community, some of them are celebrating. It’s like, hey, here’s your V-shaped recovery.
David: Right, I have a few friends in the asset management business. We don’t always see eye to eye on how to allocate, and there’s a giddiness about what they believe to be that V-shaped recovery in equities.
Kevin: Don’t bet against America.
David: I think selectively, they’re ignoring Powell’s reverse drug. That’s what our friend Bill King describes it as—a reverse Draghi, who’s warning the U. S. Economy could experience extensive and lasting damage from this lockdown, so they’re selectively ignoring that, they’re conveniently ignoring the lack of volume in this rise.
Kevin: You brought that up two weeks ago. Yeah, yeah, you’ve got to have volume.
David: Yeah, for it to be something of substance and to carry forward in time. And they’re dangerously ignoring the concentration of power within the segments, which are most short. In other words, where the financial damage has been most severe and where short positions and hedges have been most concentrated, that’s where the action has been most intense on the upside. So, the bottom line is, a short covering rally is not the same thing as a New Bull Market, but it can be alluring nonetheless.
Kevin: Well, just, very simply explain a short covering rally. Because when you go short, ultimately what you’re saying is I’m going to deliver that stock at some time in the future. So it has to be covered, right?, at some point.
David: That’s right. It basically is a buying back of the stock at a certain price, and so it’s artificial buying in that sense. There’s also derivative dynamics involved, which include options and futures contracts, which, they’re like accelerant to a short covering rally.
Kevin: Yeah, and so, if you’re short a stock and the stock market starts to go up even a little bit, you have to go in and cover that short, and that accelerates that. Doug Noland, he addressed that. You know, if you look at the stocks that were the most short, they’re also the ones that are seeing the greatest gains right now.
David: Right, he sent comments to our tactical short clients and to our wealth management clients Monday, which I think got to the heart of the matter. He said that the Goldman Sachs Most Short Index jumped 5.1%. That’s on Monday. Although this doesn’t do justice to the ferocity of the squeeze, the Philadelphia Oil Services Index surged 12.5%. Again, this is Monday. And the Bloomberg America’s Airline Index rallied 13.1%. United Airlines was up 21, Delta 13.9, Southwest 13.5.
Kevin: Again, short covering, right? In a big way?
David: Right, because, you know, keep in mind you’ve got Warren Buffett, who is liquidating these assets because he feels like it’s going to be 3 to 4 years before you see air traffic return to anything that looks like normal. So who is stepping in to buy? Well, it’s not an investor. It’s a trader covering a short position, right? So you’ve got travel-related stocks, going on with Doug’s comment, posted huge gains. Expedia gained 18.6.
Kevin: How about Norwegian Cruise Line? Everybody’s buying Norwegian Cruise Lines. Hey, let’s go on a cruise.
David: Yeah, well, that’s kind of returned to normal real quick. 18% for the day. Marriott 17.4. Host hotels and resorts 17.1. The KBW Bank index rose 7.9%. NASDAQ Bank index surged 9.6%. Dow Transports bounced 7.2. These are abnormally large.
Kevin: You’ve got to smell a rat in a way, I mean, in a way, you’re like, wait a second, the average public, the person on the street is not going out and buying Norwegian Cruise Lines.
David: Well it just tells you what kind of activity is occurring. And it’s not to say that it’s nefarious, there is no rat here per se. But it’s what kind of activity. Is it healthy? Is this normal investor behavior, saying, finally, I think the bottoms in, there’s value in play? No, the Value Line Arithmetic Index jumped 6.4%. Homebuilders 7.9, retailers, 4.2. That ends the quote. I would also note that there has been a fascinating divergence between the S&P 500 and the financial sector. If you look at the charts going back to the beginning of the year, what you have is the S &P sells off and then starts to recover and the financial sector, sold off and has basically moved sideways. It has not followed on the upside. Okay, so Monday it was up decently. But there’s still this huge gap between the financial sector in the S&P 500 and no recovery. I’m talking about a directional shift from bare to bull market. No recovery has ever left the financial sector out.
Kevin: So there’s a strange disconnect between these stocks that you’re talking about had huge rallies, a lot of them have to do with travel, and the financial sector. But there’s also a disconnect, and I think this is something I’ve had to learn through the years. A lot of times, I’ll look at the markets and I’ll think it’s the economy. The economy is something completely different. This is something much broader—that which brings in profits and earnings over time. And so when does the economy, you know, we can talk about the market rallying back, but when does the economy actually come back?
David: Yeah, because gin and the financial system goes quickly to the head, but that’s not the case with the economy. There is no sort of economic light switch which instantly you flip and the economy is back on. The process is a slow one.
Kevin: So we’re talking about growth. GDP growth. When does that start to come back?
David: Yeah, because you’re talking about measurements of economic activity. The first quarter GDP contraction was 4.8%. That’s the first decline since 2014. It’s the worst contraction since 2008 and that’s the first quarter. The second quarter’s going to incorporate more negative months. Now we’ve got April and May not stacking in very well. June’s already fast approaching, and we’re not open for business yet. So what do you think Q2’s GDP contraction is going to be? It’s probably going to make the first quarter look fairly tame by comparison.
Kevin: Well, and it feels like just yesterday. It really was just three months ago that we were talking about unemployment being at the lowest level in 50 years. And boy has that changed.
David: That’s right. So, and I love those charts, unemployment, the VIX, emerging market debt. They all take on a similar characteristic of apathy and complacency just before a significant reversal. So things look to be as good as they possibly can be. And in retrospect, they were as good as they possibly could be. A spike higher in the VIX, a spike higher in unemployment, a spike higher in the cost to finance emerging market debt. This is just, and if you’re fascinated by chart patterns, those three are very interesting when you tie psychology into the pricing dynamics and in the explosion of the upside.
Kevin: You’re fortunate because you came from a family that talked about this stuff. So you remember, from childhood actually, hearing some of these conversations. I want to make a mark in the show right now for the younger listener, because you’re going to probably live through a few things that you can go back and go “Oh, I remember that.” And this is one of those things when unemployment hits the lowest level in 50 years, look out for a change. When the VIX hits a total complacency, look out for a change. But you don’t really learn that until two or three cycles.
David: And it’s not a question of being negative. It’s just a question of looking at how good can things get? And if they’ve gotten as good as they can get, basically, you’ve expanded credit as much as it can be expanded in light of the total energy in the economy, and you have to see some form of mean reversion. That’s not abnormal. If anything, that’s what we should expect. What we have today is the Central Bank stepping in to say we’d like to suspend normal. We’d like to inoculate against what is just an ebb and flow within the marketplace and guarantee you something that is more utopian in nature.
Kevin: Let’s say they can fix it right now, and there’s nothing beyond this. We’ve already lost, what, 100,000 businesses permanently.
David: Yeah, I think that’s the longer-term issue here is you have unemployment near 15%. That reflects huge swaths of earners that are now facing a duel dilemma. One is that jobs that they held may not come back. You can look at the restaurant business. One in four restaurants are expected to close permanently. You’ve got 100,000 small businesses which are already permanently gone, and that seems like a large number, but in fact it’s actually stacked up against 30 million small businesses. It’s just the tip of the iceberg. But I think the second issue there is for those who are unemployed. You know, one, their jobs may not come back, two, their compensation has been generous enough to create almost a pensioner’s attitude towards early retirement. And I read an interesting article from an Arizona newspaper which talked about furloughed employees making more money staying at home. Basically, this is the quote from the restaurant owner. They don’t want to come back to work. It’s the unemployment. They’re receiving about $840 a week, which puts them about $22 an hour. I can’t pay them that, so people would rather say, yeah, you’re open for business, but I’m happy on the couch playing video games because, frankly, I don’t want to work for less money than I’m making now.
Kevin: When I was a manager in the toy store business when I was going to school before coming to work here, people would come in sometimes and interview for a job and then in the interview, tell me, don’t hire me. I just need to do two of these a week so that I can continue to get unemployment. I’ve never forgotten that. That just always puts such a sour taste in my mouth. But in a way, if you’re making more money being unemployed, I guess what you are assuming, though, is that the government dole – the dollar’s always going to have value. Let’s go back to the 100,000 small businesses, though, because that’s already in the rear-view mirror. Okay, 100,000 small businesses are permanently closed. How many small businesses are there in America?
David: Washington Post had a great article on this, and they deliberated over this (100,000 small businesses already being gone). And so what? Look, you get 30 million small businesses that exist in America. 4.2 million were able to access government loans (out of 30 million), so there’s a bunch, there’s a lot of companies that are still at risk, with no access to cash. And the problem in a circumstance like this is, is that outside of the current bailout initiatives, raising emergency cash is tough. It’s tough in the small business space. Very few small firms keep ample reserves of cash on the books to get through months upon months of no revenue. And if they haven’t been able to renegotiate some of their, you know, leases or fixed costs, guess what? They’re getting chewed up. So fewer can—you look at that total, 30 million. 4 million gained access to a little bit of survival capital—fewer still can access the capital markets. And again, we’re talking large companies that can issue publicly traded stock or bonds and fortify their balance sheet by raising some liquidity that way. Small companies can’t do that. Small companies can’t do that. The expectation then is that restructurings, that is, bankruptcies both personal and business, start to move considerably higher as you get into late 2020 and certainly into 2021, where you’ve exhausted the unemployment benefits.
Kevin: One of the great strengths of America through the years has been small business. I think we forget that entrepreneurial spirit comes through small business, not necessarily R&D at large corporations. So small businesses, though, we’ve been talking about how it’s being absorbed into larger organizations, this is probably just going to add to that, isn’t it?
David: Yeah, just a kind of a note. This is kind of a geographical and social note as it relates to bankruptcy. We’ve started multiple businesses in Europe, and one of the first questions that’s asked when we’re opening a business bank account in Europe is if we’ve ever gone through a bankruptcy, and if we have, they will not open a bank account for you. It’s the black mark. It is the Scarlet Letter in the business community in Europe. If you fail once you have failed forever, you are not allowed back into the business community on that basis. And it’s fascinating because here in the United States, that’s such a foreign concept because in bankruptcy code, in our law, is a restart. If it didn’t work and you do declare bankruptcy, erase your liabilities, your debts, and if you’re willing to, you can start again.
Kevin: You start again and again and again. And then you become president.
David: (laughs) Who knew?
Kevin: Yeah, you get richer and richer. You become president. I’m sorry, I didn’t mean to distract.
David: Built into the bankruptcy code is the potential for the presidency. So small businesses, you’re right. They have been in decline as a percentage of employers going back to the late eighties. They were close to 55% of all employees related to small business in that segment. In a prior to COVID-19 it was about 47%. So it’s been in decline over the last several decades, and I think the prospect here is that the decline in small enterprises accelerates from here and maybe we’re witness to a different kind of restructuring bankruptcy. But the way we engage with work and who we engage in that work with, maybe be changing structurally, and this acts as an accelerant.
Kevin: Well, let’s play a mind experiment for a second. Let’s say, five years from now, Dave, you could look ahead and say, if we were deliberate and I’m not talking about top down control. But if we were deliberate about how we would like to see America restructured—because this is going to restructure America—would we look for very large and few large monopoly corporations? Or would we want to see a number of small, strong businesses, small, strong towns. When you drive I-40, which used to be Route 66, a lot of times you’re going to pass towns that were on route 66 and these towns were vibrant. There was a self-sustainability of town after town after town. I remember my grandparents, they owned a grocery store in Shamrock, Texas, and they had heard that the interstate was going to bypass the town. And I was horrified because the way they talked about it, it was going to kill the town. But when 66, Route 66, went through each town, people would stop and that there was just something about it. There were farms around each of these towns, their strength—later in the show I’d like to talk about that. The difference between, say, a big, sprawling city and a number of small towns. Same thing with companies, a big monopoly like Amazon or a number of small mom and pop stores that actually can service your needs right there.
David: Well, I think one of the questions that gets asked a lot is, what is sustainable? I think one of the other questions that could be asked is, what is healthy?, in the sense of what promotes better relationships, deeper, more meaningful life experience,
Kevin: Waving to your neighbors as they walk past…
David: Yeah, well, that’s been a net benefit, and I don’t want this to sound sort of anti-cosmopolitan. There’s nothing like getting to the matter, seeing a ballet or going down to Santa Fe for an opera. I mean those are all wonderful, but I’m wondering if the big city experience isn’t more treacherous post-COVID-19. Where you say, Why would I want to get on the New York City subway? Why?
Kevin: Now it’s COVID, later it’ll be because there’s an economic disparity between people, huge.
David: And a greater desperation. My desperation would be trying to get out of the grip of Bill de Blasio. I mean, frankly, makes me think, What’s he wearing when he goes in to grab these swimmers?
Kevin: Yeah, I’m wondering if he can social distance and purposely go into the water and pull them back out. (laughs) Thanks, Bill.
David: Yeah, well, what you said about Shamrock, Texas reminds me of the kids movie Cars where you know, I forget the name of the town, but it’s the story of Route 66 and the bypass and the highways, the freeways and this town dying. And the only thing that saves this town is this little race car, little red race car, that brings notoriety and fame back to it, cause now everybody wants to visit the museum where, you know, the underdog came from, and, you know, it’s that kind of story.
Kevin: Well we’re not trying to be nostalgic as much as we are. What, what’s functional long-term?
David: I read a book earlier this year by Charles Marohn, and I would highly recommend it. It’s a thoughtfully written book titled Strong Towns, and I was invited to be on his podcast. He wanted to talk about The Intentional Legacy.
Kevin: So he read your book, Intentional Legacy, invited you on, and you read his?
David: Well, I thought it would be a good idea just to know who it was that I was talking to, and it was riveting, it was very interesting. He’s a certified professional engineer and a land use planner, that’s what he does for a living, and he cares very much about what the future looks like. And so, I felt fortunate enough to read his book prior to the interview, and I think I should have. Maybe we will interview him. And it’s thought provoking, it looks at what would be required to rebuild American prosperity, and sometimes it’s just kind of the status quo that wins out until the status quo is dead. And I think Strong Towns is a book whose ideas are critical as we look at sort of a mauling of the economic landscape. And I’ve always seen that there’s opportunity in crisis.
In this case, it’s not so much opportunity at the expense of someone else, as is often driven in the marketplace, a question of one party winning the other party losing. This is a different mode of operation altogether. I would encourage you to get the book, read it, and it’s a vision that encourages a reimagined landscape. And I think there is an opportunity forced upon us as we look at the businesses and the demographic concentrations represented by not only the city landscape but also the suburban landscape, which may look very different moving forward. So try this, as you’re driving around, count the strip malls that you pass to and from work. That assumes that you’re going to work, I suppose. But that’s real estate. Those are the small businesses that are most likely to be compromised, to disappear. And, yeah, I read a Wall Street Journal article this last week titled “Corona Virus finishes the retail reckoning that Amazon started.” And when you start connecting the dots and saying, okay, all those strip malls, um, if they’re not full, what do they look like? That this begins to paint a not so pretty picture of urban blight. And I think that’s a highly probable secondary consequence of the COVID-19 pandemic. Going back to the Wall Street Journal article, Corona virus finishes the retail reckoning that Amazon started, not only because they’re gone, but who wants to go to them? We have yet to go back to normal, and I don’t know when that will be.
Kevin: We have been seeing that happening now. I’m not being conspiratorial at all. I’m just saying, if you were Bezos and you could see ahead to this Coronavirus, you’d go, well, this is going to help the business. Yeah, you may not be behind the Coronavirus.
David: No, you’re right. There’s no conspiracy here. He’s just Jeff. He’s not Beelzebezos.
Kevin: (laughs) Beelzebezos, uh, all right, so yesterday I got a call from two sisters that have been clients of mine. One lives on the West Coast. One lives on the East Coast, they’re in cities, big cities, and through the years they’ve read your dad’s newsletter. And they agree, you know, they ended up buying together a property in Montana that they wanted to retire to. One’s a doctor. You know, one works for the government and they called yesterday and they said, We just read your dad’s latest newsletter and we’re concerned what’s going to happen to the cities? What’s going to happen to the cities when you have this income disparity? Is it time for us to move to this place in Montana? And they were actually concerned, to be honest with you, they weren’t ready to do this. I could tell, you know, sometimes when you’re right, but you don’t want to be?
David: (agrees) Mhmm.
Kevin: That’s exactly where they were at that. They were right for the long term. But now the decision is coming. Do we now move to this place in Montana? And I just encouraged him. I said, You know what’s keeping you in the city? And they said, Well, that’s where the food is, the transportation, all that other stuff. It’s like, well, you know, you got to think that through. So what do you think is going to happen to the cities if this continues I mean this economic downturn?
David: Last night we watched this little clip from Anthony Bourdain’s first television deal, and it was, this is before he did No Reservations. And, you know, he’s traveling around and he’s looking at restaurants and he is a chef, and he’s kind of analyzing what we like about this food and whatnot. You’d have to like food if you…anyway.
Kevin: Well, I like Bourdain. I mean, I really enjoyed watching him.
David: So he’s at the French Laundry with a couple of chef friends, and…
Kevin: The French Laundry is a restaurant in Sonoma right?
David: Yeah it’s Keller’s, it’s in Yountville, Napa Valley and probably one of the best restaurants in the world. And so they’re there, and he goes out to the farm with Keller, and he’s like, you know I have been a chef all my life, and I never knew where food came from. And what you just said reminded me of that. The food doesn’t come from the cities, and food doesn’t come from the transportation hubs in the cities, food comes from the farms. Food comes from places where the closer you are to nature, that’s your access point. That’s your access. But I mean, I think about the current crisis with protein. We’re seeing less and less pork distributed in the United States. There is less and less people working at slaughterhouses and so beef prices are on the rise because there’s this weird, strange thing happening with supply and demand. And yet here in this community, nothing changes because we know where our farmers are. And we know the butcher shops where we can go get our meat. And there has been zero change in terms of the transportation in to this place. We are independent of the supply lines, and I think we’re glad to be independent. But that’s a small town dynamic where we prize what comes off of the farms, and that’s what we do put on the table.
Kevin: Well, not everyone can move from the city. Your dad moved us from the city back in 1992. My encouragement to these ladies was, consider, in the next couple of years, maybe sooner, going ahead with your plan. But what about urban blight? I mean, what does it look like for the people who stay in the city?
David: And this is not from Marohn’s book, Strong Towns. This is from the National League of Cities, and they’re estimating $360 billion loss in tax revenues from 2020 through 2022. And this is municipal revenues. This is a maintenance nightmare. If you can imagine Detroit in the context of municipal crisis, now pick 50 cities and imagine them all as Detroits: out of money but not out from under the burden of long-term liabilities. And so this is where I think any migration, any shifting of jobs, any employment situations that are not as reliable, that require people to go someplace else. Now all of a sudden you’re looking at suburban and cityscapes, which they’re just not what they once were. Not as vibrant, not as healthy and, frankly, not able to pay their own way.
Kevin: So what you’re talking about, okay, the way you would look at a city if you were to look at the functionality of it is you’ve got people who work in the city, but for the most part, the suburbs that surround the city there, maybe an hour, hour and ½, 2-hour drive into the city. But it’s worth it to get back out to the suburb. Do you see that changing?
David: Yeah, because I think that’s, you know, we talked about secondary consequence of urban blight. The tertiary consequence would be your residential areas at the outskirts. The very highly uncertain economics there is for the daily commuter. If you’re putting in 1 to 3 hours a day just so that you could afford a home because again homeownership is typically at the outer edges of a city, it’s the expense of hours on the road to get to where you are employed. Does that continue? Is that reasonable? Is that realistic? And I’d say not because of astronomically higher fuel costs. At least that’s not our concern today. Maybe it is future tense, but it’s not today. You’re talking about a shrinkage in the labor force, which ends up hitting those peripheries the hardest, and again that’s the geographic periphery around your major cities. Just kind of consider concentric circles around your major metropolises and the farthest out you are, I think those are high risk areas, you’re talking about suburbia. Suburbia. So the most vulnerable workers are, this is NPR’s planet money, sub 50,000 year. That’s 50% of all households. Why? Because you’re talking about just paying the bills and reserves are very thin. I mean, the difference between desperation and calm today is the money coming in from the federal government. And it was the L.A. Times last week who wrote that this economic devastation the pandemic wreaks is going to be focused on the ultra poor and could ultimately kill more people than the virus itself.
Kevin: If indeed people are relying on the federal government, what they’re really doing is, this is, is this not? We’ve talked about modern monetary theory, and it was a theory until about 12 weeks ago, and it became fact because of the virus. We have uniform basic income that’s been talked about. It’s a form of socialism. Not a form—it is true socialism where everybody gets an income, whether they work or not, Do you think that that’s going to factor into this next political cycle?
David: Yeah, Last May, I was writing a paper for an economic conference, and I chose modern monetary theory. So looked at its history. It’s not so modern. The iterations have been there, over and over again. It’s just what we do. We can call it whatever we want.
Kevin: Money grows on trees—that’s what it used to be called.
David: Print and pay, print to pay. Yeah, but yet is this the context for introduction of UBI, universal basic income. And again, we’re talking about kind of the marriage up of modern monetary theory, the ability to print whatever you want and pay whomever you need to. And Universal Basic Income is basically saying everybody adult aged should receive some minimum number with no strings attached. Maybe it’s $500 a month. Maybe it’s $1,000 a month just for breathing, for living for so that you don’t ever have to experience any form of poverty.
Kevin: Well, it sounds kind. It sounds just like a utopia. Sounds kind.
David: Well, and Pope Francis has loved it. He’s gotten all over this. He says yes to UBI. He’s not the only one. There’s actually a huge swath of people in Silicon Valley who I think are bothered, that I think their conscience bugs them that through technological innovation, change, robotics, etcetera, etcetera, we’re creating a world where it’s going to be difficult to employ people, and you better pay them or they will revolt. So there’s a pragmatic element to the Silicon Valley folks who are changing the world through technology. And there’s real world implications to that in terms of productivity gains and an increase a natural increase in unemployed people.
So you know you could look at it is an obligation of the haves to the have nots because it has to come from somewhere. It’s not just print and pay, though modern monetary theory is a compliment. You are talking about an increase in wealth tax, an increase in income tax to those who are still paying from current income. But government is the convenient channel for, I mean, if you want to think of it as a kind and compassionate universal cash distribution, great. But that’s the rule that government supposed to play, and it’s really interesting as I’ve read up on some of this, there’s survey after survey of people polled, you know, what do you think of UBI? And a lot of the polls are from people who over the last 6 to 12 months have been receiving $500 a month just because, and it’s really interesting. They say they like it.
Kevin: Yeah, well, no wonder they like it. I mean, if this actually, if we were to adopt UBI, I mean, what percentage of America would be literally on the dole without having to work?
David: Yeah. I mean, UBI essentially provides half of all American households with a permanent guaranteed income, because again, we’re going back to the most vulnerable. That 50% that NPR talks about, 50% of all households below the $50,000 annual income mark.
Kevin: If it works, why wouldn’t you vote for it, Dave?
David: And this is where I think it’s particularly intriguing. Talk about shaping the electorate. You might even argue capturing the electorate. This is how you shape the electorate in the first half of the 21st century. And if Bernie was elected, I would say this is a given. This is what’s coming. Who knows in 2021. But you do have the UBI argument, which is gaining popularity. There’s a clear popular appeal, and I think with the right advocacy could become something that we’re voting on, that we’re putting in place and assuming this crisis can be stretched out long enough, because this is really what happens, if the crisis has stretched out long enough for desperation to become a collective cry for help, then this could be it. This could be it. Just the right circumstances to move the UBI ball down the field.
Kevin: Well, up to this point, we’ve had to, at least we pretend, that we try to keep a budget, right? And then we go over and we call that the deficit. But the only reason we have a deficit is because we said, well, this is how much we have to spend. Well, part of modern monetary theories to just say, well, let’s don’t call it a budget anymore. It’s just whatever we need to print at the time and then we’ll loan ourselves the money, it just doesn’t sound right.
David: Well, set aside the economics and look at the psychology, or even if you want to put it in terms of a philosophy, why I object to UBI so strongly is because our work and our dignity and our identity are absolutely tied together. And when you begin to compromise on the work piece, you begin to change how dignity is experienced, how respect is conveyed and how you understand who you are, what it is that you do and the value of the work of your hands. So I look at sort of this implicit value and dignity to the work that we do and think, it’s a compromise of our humanity to say, oh, well, you can go do whatever you want now that someone is paying you to do nothing. Maybe it’s something significant to you, but again, I think there’s a dangerous gap in there, psychologically and philosophically to live that out. And you see this in communities that have gotten stuck.
There’s a gal here in town who is a master at Shakespeare, and my wife and kids have had the opportunity to work with Mona for years now, and it’s a real privilege. She’s very talented. She spent a semester teaching Shakespeare in Manchester, England. And Manchester has been stuck in a poverty cycle for a long time. And it’s interesting that on an intergenerational basis, everyone is just waiting to get old enough to get their slice of government cheese and a nice enough check that keeps them comfortably on the couch. And to try to teach Shakespeare in Manchester, England, was virtually impossible because no one saw the real value in it. Why would you be educated if your education is not taking you somewhere? The only place that they were interested in going was the couch, where they could do whatever they do, and receive their check, watch whatever telly they were going to watch for the day and define their meaning and significance that way. Again, our work, our dignity, our identity, these things, are very, very important. And to the degree that we consider the dole as a reasonable option, understand that we are destroying a people, we’re destroying who they are, how they feel about themselves, and ultimately what they can contribute to society.
Kevin: So going back to a budget, I know my wife and I have a budget. I have to spend less than what I make in the long run, our government doesn’t seem to do that. So are we seeing the end of a national budget?
David: Well, and I think that would be, I mean, we’re the closest now, with almost 37 million people on unemployment benefits, to a universal basic income. Expand it further, and you can get it into every household. And it’s my view that the final unhinging of the national budget is that universal basic income. It would be this generation’s outside social scheme that either bankrupts the nation or forces taxes so high that incentives for business and entrepreneurship are pressured further and maybe just migrate themselves. So listen, I like the phrase “Don’t bet against America.” We hear it from the oracle of Omaha, Warren Buffett. We heard it from Jerome Powell this last week, implicit in his message, and it’s there inside my head. Unless the America built by entrepreneurial verve and free enterprise has died from Coronavirus. Or maybe it’s the safety precautions adopted because of it.
Kevin: Well, I feel completely betrayed whenever I hear that. When somebody says, Well, don’t bet against America what they’re really saying is keep feeding us what it takes so that we can create debt unlimited. That’s a lie. That’s a lie. I’m not betting against America when I get out of the debt system.
David: Well, COVID is an excuse for many things, and I think that we should be extra vigilant with any proposal that’s promoted in this context. You get higher social pressure, higher anxiety, some of what you were talking about earlier about this disconnect between ideas and non sequiturs. But I think we need to be vigilant in that context because politicians and policymakers have always recognized they’ve always recognized the cry for help as a once in a career opportunity. It’s a once in a career opportunity. What we need is strong people from strong families in strong towns, and they don’t need strong government to fix anything.
Kevin: Let’s go back to the people who say, Well, you know what? If I can make more on unemployment, I’m just going to stay there.
David: And that’s the issue. In many instances, unemployment benefits are today higher than the income previously earned, right, so there is a twisted incentive there, and I sat in a campground this week and exchanged banter with a couple at the next site over. They’re making more money furloughed than employed. So in a weird twist of fate, they’re on a paid vacation, making more money than they were beforehand. And again, it feels like a pension for millennials or something. I mean it might be tough to get off the gravy train, and I guess, can we assume that dependency is, in fact, something that particular politicians prefer?
Kevin: Well, because they need the vote. It’s interesting how the Democratic Party through the years has courted sometimes the side that they don’t actually even support. They just need to give the illusion that they support it and that they’re going to continue to support it with free money and they’ll pick up a particular group that’s not necessarily in their wheelhouse.
David: Right, I mean, it doesn’t change if you’re in politics, you enjoy the country club, you enjoy the champagne…
Kevin: …and you need the vote.
David: So you can still be a socialist and enjoy the champagne. And so, yeah, I mean, consider the weird relationship that the Democratic Party has had with the African American community. You’ve got employment figures for the African American community, which have improved more in that community under the Trump administration than any other on record.
And the Democrats have been facing an existential risk. First, they lost the labor vote in 2016.
Kevin: That was one of the groups that they had courted and said that they were on their side, but they lost them.
David: Yeah, and second, you’ve got any marginal improvements in the economic positions of their remaining constituents. Guess what? It erodes the control that that party has maintained for decades.
Kevin: Yes, but enter COVID-19, enter the disease.
David: And again, so can we assume that there is a dependency that some politicians prefer and COVID-19 raises an interesting point for me, it maybe gives the Democrats a road back to relevance. For us, it’s the road to serfdom. For them, it’s a return to Roosevelt era government spending, taxation and economic and social controls. But again, the controls is the key element there.
Kevin: Well and we talked about government spending a couple of weeks ago, building, you know, Hoover Dam and putting faces on a mountain, presidential faces, but I was reading about the Depression. What caused that and how many were unemployed. Now granted, the population was lower, but we had 15 million people unemployed back during the Depression. We’ve got more than double that right now who are taking unemployment at this point, the benefits.
David: And this is where I think you’re looking at measurements in the real economy. Real economic declines haven’t registered at all at this point. Well, to some degree, they have. But nearly 37 million Americans have applied for unemployment benefits. They have money coming in, they’re spending what they have, in some instances more than what they had, in some instances less than what they had. But they’re still spending. That aid offsets the lack of income, eases the tension in the present environment. But it’s temporary. Whatever we count as GDP contraction there in the first quarter, nearly 5%. That’s small compared to what it would be without the fiscal gap filling. It is what it is. A short term, it’s necessary. I get that. But long term, that kind of interventionism is detrimental. And right now the unemployment benefits, yeah, they’re temporary. Temporary, unless. Unless the closure of the economy provides that transitional backdrop needed to move a huge block of previously working class citizens into a state of dependent relationship.
Kevin: And we can’t believe in gradualism. Okay, there was a guy named Immanuel Velikovsky, and he knew Einstein. And he wrote a couple of good books about what he calls catastrophism, remember that? And Velikovsky basically said, look, if you want to look at history as this long, gradual slope, that’s always the same, you know, he said, No, no, you can go back and look at rapid change. Dynamic, rapid change, catastrophic events. It’s blown my mind, Dave this last 8 to 12 weeks. Could we see the whole world just all of a sudden go into a social experiment that we call communism?
David: We’re fond of the phrase: there are decades where nothing happens, and weeks where decades happen. And in this case, it was one month, four weeks that erased a decade’s worth of jobs gains. Four weeks that erased a decade’s worth of jobs gains here in the United States. That’s one month. One month. So back to the benefits being temporary, unemployment income generally lasts 26 weeks. That’s how it was structured. It’s that way in almost every state. It’s a little bit less in a few states, but then you’ve got the federal supplement on top of it and extends it in additional 13 weeks. That gets you, do that, divide by four, gets you to over nine months so that that gets you to year end in most states. And the current legislation for federal aid and the extended benefits they expire December 31st. So that’s we kind of have it covered through the end of the year. So without further legislation and more direct fiscal intervention, year-end is when we get to see the really economic issues, maybe we’ve recovered by then. Maybe we’ve opened everything up. Maybe it’s business as usual. People are dining out and going to movie theaters and back in the subways. But I think without a doubt between here and there, more fiscal stimulus is coming.
Kevin: Okay, so I’m a Democrat, let’s say. Let’s pretend like I’m a Democrat and I’m looking at the end of the year and I’m like, hey, there’s an election coming. If everybody’s talking about unlimited free money, why wouldn’t I talk about more? George Cantor back in the 1800s, studied mathematics of infinity, and one of his theories was, there are infinities that are larger than infinities that are larger than infinities. Now I have read a lot about this, and I still don’t fully understand it. But what he basically was saying is there’s bigger infinities than the one you can come up with.
David: Well, it sounds like the jockeying between the DNC and the RNC. My trillion dollar package bigger than your trillion dollar package. Pelosi came up with the additional three trillion in stimulus was not a bipartisan project. So, as you can imagine and to be fair here, to be fair, this would be the case coming from either side of the aisle.
Kevin: That’s true.
David: But imagine there’s a lot of focused generosity in the recipients of that fiscal plan. Maybe they also get buttons,
Kevin: Vote Biden buttons!
David: And pledge cards with the checks in the mail.
Kevin: Okay, so what button would they get if they voted for Trump? Let’s say Trump comes up with a bigger infinity?
David: Well, that’s the thing. If the GOP had hatched the 1800-page redistribution plan, guess what the buttons would read? Vote Trump. So something will get negotiated. It’ll be between one and three, and maybe they surprise us and it’s four or five trillion. At this point, Would you be surprised by larger numbers? And honestly, what would you? What’s a number that you would be surprised by? Again, I love going back to 9/11 and one of the first analysts who looked at this and looked at the engagement as we were sending troops over to Iraq, and he said, Oh, this is going to be hundreds of billions of dollars and they fired him on the spot. They’re like, That’s absurd. That’s preposterous. Little did we know his imagination was too tied to calculations. It was hundreds of billions that he was imagining and calculating. He should have thought bigger. It was trillions when all was said and done.
Kevin: Well, and there’s always an opportunist. Okay, you know, we were joking about Bezos and you said Beelzebezos. I don’t know if you really meant that.
David: That’s totally uncalled for.
Kevin: But, okay, let’s say that you are just strategically looking at something and you have no heart, and you’re looking at the election. Wouldn’t you go, let’s make sure the economy stays weak until the election.
David: Well the DNC has a perverse incentive to keep the economy weak past year end, past the election. They have a perverse incentive to keep the economy weak while delivering as much stimulus as possible selectively in the interim. And I don’t claim to know the scientific issues with COVID-19, and I’m not sure the scientists understand what they’re fighting yet either. But I can speak to the financial carnage and I can guess at the deep social and political scars that economic closure is in the process of creating. So for safety we’re giving up liberty. And maybe that’s appropriate, I suppose, to a degree. But also for safety, we are reconfiguring the employment landscape,
Kevin: Putting small business out of, they’re going to go away,
David: Pressuring small businesses towards extinction, concentrating power in the hands of corporations that have better access to capital and can therefore survive and become consolidators. And so the tombstone we read in 2021 or 2022 may well be for the American entrepreneur. May he or she rest in peace. The generational lessons learned, if we’re not careful, will be that risk taking is not worth it. For security, work for a large corporation or work for government. They are truly the last to run out of money and ultimately your security. Even if they remain incapable of generating on their own. And you can look at both of those, the large companies that should have gone away and didn’t, and government that’s the zombification of the world as we know it. I hope it’s not lost on our listeners that here we are in the middle of a national health care emergency, and we have the medical industry, which is imploding.
Kevin: Strange timing.
David: That is a public policy problem first and foremost, and we’re still seeking public policy solutions to the crisis that we’re in the midst of. You have Michigan doctors suing Governor Whitmer over the shutdown order, claiming that the curve has already been flattened. One of them is a surgeon, part of a big medical practice. Dr. Randall Baker says this shutdown is risking lives and imperiling health. My sense is that the shutdown puts even more than that at risk.
