The U.S. Government Embarks On The Most Massive Fraud In World History

While everyone's attention is diverted to the maybe war in Syria, back here at home the Federal government is set to embark upon the most massive organized fraud in world history.   I'm talking about the incipient effort to get the healthy assetless young to sign up for health insurance under Obamacare. 

The single most obvious and intentional feature of Obamacare is that it is a bad deal for healthy young people, and particularly those who have no substantial net worth, which is nearly all of them.  The whole idea here is to make insurance affordable for those for whom it currently is not, namely those who are already sick and/or old.  Since the money has to come from somewhere, it has to be that the young and healthy will pay.  The designers of the Act got as far in their thinking as to realize that the young and healthy aren't quite stupid enough to get into this without some level of force, and thus we have the "individual mandate," under which everyone is supposedly required to buy insurance, even those for whom it is manifestly a bad deal.  The designers also got far enough to realize that merely ordering people to spend big money on a bad deal wouldn't work, and they would need some incentive.  So they put in the tax penalty for failing to buy the insurance.   

But unfortunately, pretty much everybody who has looked at it has realized that the tax penalty is set at a level too low to make it worthwhile for the young and healthy to buy the insurance.  Add to that that the designers threw in "guaranteed issue," under which you can't be denied coverage just because you had gone without it for a while.  In other words, you can go multiple years paying the tax penalties, wait until you get sick, and then buy the insurance only when you are sure that your healthcare costs will far exceed your premiums.  For the young and healthy, this is clearly the right strategy for dealing with Obamacare (with undoubtedly a few exceptions for people with exceptionally high income or inherited assets).  It's hard not to see a classic insurance "death spiral" developing rather quickly as the young and healthy decline to sign up.   

What now?  Well, to judge by some news reports and government web sites, the government's current idea is to launch a massive campaign of lies and fear to try to get the young/healthy to sign up and pay.   Check out for example this July 24 article from the AP, via CBS, describing the upcoming government promotion efforts.   First of all, the budget:  AP gives it as $684 million!  That's a pretty damning indication right there that it's not a good deal.   

So what's the message?  Just as an example, here's some mumbo jumbo from the HHS main page on the subject: 

HHS is responsible for implementing many of the health reform changes included in the Affordable Care Act. HHS is strengthening and modernizing health care to improve patient outcomes, promoting efficiency and accountability, ensuring patient safety, encouraging shared responsibility, and working toward high-value health care. HHS also is improving access to culturally competent, quality health care for uninsured, underserved, vulnerable, older, and special needs populations. These reforms and the resulting improvements in the care provided on a day-to-day basis will improve our foundation for emergency preparedness.  Stronger health care will enhance our Nation’s ability to provide extra medical care capacity when needed. Individuals and communities also will be more resilient in the face of emergencies if they are healthy and have access to quality care on a regular basis.

Well, can you please tell me if this is a good financial deal for me?  How about some numbers of how much this will cost me versus my alternative strategy of waiting until I get sick and buying the insurance then?  I can't find any information from HHS whatsoever on those subjects.  The whole idea is to hide the truth.  The closest thing I find in the long quote above is "encouraging shared responsibility."  I think that means, hey 25 year old earning maybe $30,000 per year and with $50,000 of student loans-- It's your civic duty to spend a several thousand dollars a year on our spending priorities rather than your own!

The AP/CBS article is almost humorous in the lengths to which it goes to avoid using the "F" word.  Here's their take on the basic government pitch:   

It will make you stronger. It will give you peace of mind and make you feel like a winner. Health insurance is what the whole country has been talking about, so don’t be left out.

Sound like a sales pitch? Get ready for a lot more. 

What exactly is the incremental "peace of mind" in a world of guaranteed issue?  Or try this description of the effort in Colorado to find an "effective message": 

There, TV commercials show people being magically transformed into champions. One minute they’re shopping for health insurance on a computer, the next they’re winning at a horse race, in a casino or at the World Series with champagne corks flying. The slogan: “When health insurance companies compete, the only winner is you.”

Well, that one is completely false and misleading, but at least it's not based on false fear like the HHS web site. 

The numbers involved in this scam make all private sector frauds pale by comparison.  Hell, Madoff was reported to be an approximate $60 billion scam (over 20 plus years) when measured in "Madoff dollars" (the fake money you thought you had); measured in hard dollars invested, Madoff was more like the low $20s of billions.  This one is in the hundreds of billions per year.   Nothing else comes close.

Of course the young and healthy with any degree of smarts are not going to be fooled.  No amount of massive government spending on such a transparently phony ad campaign can possibly work.  But that doesn't mean that there won't be huge collateral damage.  The ones who will be fooled are the least smart and most vulnerable -- of course.   

Do The People At The Federal Reserve Have Any Idea What They Are Doing?

Between the responsibility to manage the money supply and additional tasks taken on under Dodd-Frank, the Federal Reserve has a big role in the economy.  They can't force the economy to perform well, but they certainly can screw it up if they don't know what they are doing.  Do they know what they are doing?  Unfortunately, all the evidence points to "no."  I hope I am wrong, but I don't think I am.

In another important op-ed in the Wall Street Journal on Tuesday, John Cochrane of the University of Chicago calls attention to the trendy idea among our economic policy institutions that central banks can and should "intensively monitor the whole financial system and actively intervene in a broad range of markets toward a wide range of goals including financial and economic stability."   Cochrane refers to this 2011 report from the IMF laying out the agenda for so-called "macroprudential policy," meaning the use of a menu of macroeconomic policy tools by which geniuses with Ph.D.s from Ivy League institutions, or maybe from the ENA, can spot instability coming in an economy and use the magic of instantly changing regulations and an infinite check book to put everything right.  A bubble is brewing?  We'll buy bonds!  We'll sell bonds!  We'll increase reserve requirements!  We'll decrease reserve requirements!   We'll increase capital requirements!  We'll decrease capital requirements!  

Cochrane is extremely dubious, to put it mildly.  Me too.  The idea that ivory tower geniuses can spot an incipient bubble and fix it by changing rules and meddling in the financial markets, when serious market participants committing large amounts of their own money cannot, is completely preposterous.  Can anyone identify even one example where bureaucrats have spotted and corrected for a financial bubble in a timely way? 

Let alone that the proposed cure is virtually guaranteed to worsen the disease rather than cure it.  Threaten to change the main rules randomly, arbitrarily and with little or no notice just as things are starting to go wrong -- How can that possibly work?  Markets thrive on stable rules.  Here's what James Madison had to say about this in Federalist 37:    

Stability in government is essential to national character and to the advantages annexed to it, as well as to that repose and confidence in the minds of the people, which are among the chief blessings of civil society. An irregular and mutable legislation is not more an evil in itself than it is odious to the people. . . .

Well today we have dispensed with the need for "legislation," but we can have "irregular and mutable" regulations changeable on whim by bureaucrats with fancy academic credentials but with no practical experience in the world.  If they knew what they were doing, they would promptly disclaim any ability to perform these tasks.  But they have way too much hubris for that.   

Meanwhile, how are they doing at their other job, managing the money supply?  You may be thinking, we're now through QE I, II, III and maybe a few more, and inflation doesn't seem to have taken off.  Could they be doing something right?  Don't count on it.

The world history of sovereigns expanding the money supply is a history of one disaster after another.  Why not this time?  Well, today they don't just print the currency; most of the money supply manipulation is more indirect.  The money supply is mostly bank accounts.  The Fed buys bonds, creating "monetary base," and the banks then lend out the money in several rounds, creating the bank accounts that form the money supply.  Except that today the banks are mostly sitting on the multiple trillions of dollars of monetary base that has been created by QE I, II, and III.  Don't believe me?  Check out this graphic of "excess reserves" from the St. Louis Fed.  (Apologies that it is not currently possible to import the graphic into this web site, which is systematically rejecting all graphics.  But please look at the graphic, which is very dramatic.)   The graphic shows that since at least 1950 until late 2008, when QE I began, the banks promptly lent out all available monetary base created by the Fed, leaving "excess reserves" of a flat zero.  From the start of QE I, excess reserves have shot straight up.  Today they are close to $2 trillion.  Given that the money supply (M2) is currently between $10 and 11 trillion, and that reserve requirements are mostly 10%, that means that the money supply could promptly triple as soon as the economy starts percolating and the banks lend out the excess reserves.  It hasn't happened yet, but it could happen at any time.   When the money supply triples, unless output simultaneously triples (impossible), then the price level will triple.  Some would call that a 200% inflation.  

I think the people at the Fed believe that they are such geniuses that they will be able to see this coming and manipulate some regulation or other to stop it just in time.  Again, there is no empirical example of bureaucrats actually having this ability.

According to Ezra Klein today on Bloomberg, the "overwhelming favorite" candidate to take over the chairmanship of the Fed is uber-genius Larry Summers.  How much of a genius?  Well, besides being former President of Harvard, Larry Summers is the one whose June 2 article in the Financial Times claimed that  "rapid deficit reduction" would lead to decline in "output and jobs," and a "weaker economy," that would cause "our children" to end up with "more debt and less capacity to bear the burden it imposes."  I guess he's never heard of Singapore!  

Again, all the evidence is that the people at the Fed have a huge amount of hubris and no idea whatsoever what they are doing.  And it's about to get worse! 

Venezuela Shows The World How To Practice GDP Fraud

I have noted multiple times (for example here) that the universal practice of counting government spending at 100 cents on the dollar in GDP turns fraudulent when governments start to manipulate their spending in order to manipulate the GDP numbers.  Does it matter?  Let us consider the extreme case of Venezuela. 

For readers not following events in that troubled Latin American country, the last about 15 years of its history have been dominated by a guy named Hugo Chavez.  Chavez was first elected President in 1998, and re-elected in 2000, 2006 and 2012.  He spent his nearly 15 years in power imposing what he called the "Bolivarian Revolution," along with a personal form of socialism/authoritarianism.  At the time of his final re-election in October 2012 he was critically ill with late-stage cancer, and he died in March 2013, leaving Venezuela to his personally-selected successor Nicolas Madura.

How has Venezuela been doing during the last 5 or so years of Chavista rule?  If you believe the official economic statistics, just fine.  Yes, Venezuela  is rather dependent on oil as its chief export, so that when oil prices took a big tumble from mid 2008 to early 2009 from about $140/bbl to $65/bbl, Venezuela's economy took a dip in 2009 and into 2010, which they admit. Here is official Venezuela GDP data from the Central Bank. But putting aside the 2009-10 event, the official statistics show fairly impressive GDP growth in 2008 (6+%), 2011 (4.2%), 2012 (5.5%), and into 2013 (0.5% in Q1 and 2.6% in Q2).  It would be great if the U.S. could match those kinds of numbers! 

Well, let's try to see what kind of information we can get about the real economy.  The Wall Street Journal had a big article on the front page in the August 18 edition titled "U.S. Rice Farmers Cash In On Venezuelan Socialism"  (unfortunately behind pay wall except for the first few paragraphs).  Even in those few paragraphs, we learn that Chavez's policy of nationalizing large farms has turned Venezuela from an exporter to an importer of rice.  The remainder of the article covers how production of many other items, including steel, has declined with nationalization and government control.  

For a longer non-pay-walled treatment of the real Venezuela economy, try this from Foreign Policy on May 10.    Here's an excerpt:

 [I]t is getting harder to find items such as sugar, cooking oil, and corn flour -- an essential part of any Venezuelans' diet. According to latest figures from the Central Bank, scarcity peaked in April to reach a historic record of 21.4 percent. This means that roughly 1 of every 5 products consumers want to purchase is missing from the shelves. Not surprisingly, Venezuelan consumers are being forced to queue for basic staples, sometimes in an undignified manner. The photo above shows shoppers noting their place in line while shopping for corn flour.

Rolling electricity blackouts continue to be yet another thorn in the government's side. They've been the norm following the complete state takeover of the electricity industry in 2007.

Well, how could GDP possibly be growing at those impressive rates if production of everything that counts is going down?  Perhaps the price of oil is going up?  Turns out that the price of oil has been fairly stable since the beginning of 2011, fluctuating between about $80 and $110/bbl.   (Chart of NYMEX prices here.)  That's not the answer.  Also, Venezuelan oil production has declined since the start of the Chavez years, going from about 3.2 million barrels per day in 1998 to about 2.3 million in 2012, and the decline has mostly continued in recent years.  According to a chart here, Venezuelan oil production declined in 2008, 2009 and 2010, had a slight 3.8% increase in 2011, and was completely flat in 2012.

The answer can only be one thing -- an explosion of government spending, dishonestly counted at 100 cents on the dollar in GDP as if it were real wealth-generation.  According to this from Bloomberg last September 13, Venezuela had a 67% increase in government spending in the run-up to the 2012 election.  That's one way to get a 5% increase in GDP!  The problem is, it's not real.  The Bloomberg article reports that the biggest piece of the increased spending was for subsidized housing -- one of those destructive government programs that actually decreases real wealth and income.  But of course they count the spending at 100 cents on the dollar positive.  And thus you can see how a country can report 5% GDP increase when in fact its economy is in serious decline.

But of course, everybody who counts takes the fraudulent numbers without the slightest skepticism.  For example, the CIA in its 2012 World Factbook here reports the official government numbers of 5.5% GDP growth in 2012 and 4.2% in 2011 as if they were real (although it does say as to 2011 that "record government spending" helped to produce the result).  The World Bank also takes up the official fraudulent numbers and passes them on without comment here. 

Again, does it matter?  Believe me, the United States is doing the same thing, just, so far, on a smaller scale as a percent of GDP.  But with U.S. GDP growth running under 2% per year, could government spending increases result in positive GDP growth figures when honest accounting would show negative?  It is absolutely possible, and becoming more likely all the time. 

Second Circuit Again Orders Argentina To Pay

Forgive my fascination with the saga of the defaulted Argentina bonds, but the Second Circuit has again weighed in with a new opinion out yesterday. 

The opinion is of limited significance in itself, dealing only with affirming the specific remedy ordered by the District Court and enabling this aspect of the case to advance, should Argentina so choose, to a cert petition to the Supreme Court.  Given that this decision is based just about entirely on state law of contracts, I wouldn't view Supreme Court review as very likely at all.   (Although don't forget that there is a cert petition already out there, arising out of last fall's Second Circuit decision, and purporting to raise at least some issue, however thin, out of the Foreign Sovereign Immunities Act.)

But what I find interesting is the fundamental difference in view of the world between the Second Circuit in this decision and the U.S. amicus brief submitted in the context of last fall's briefing.  The U.S. amicus brief is signed by U.S. Attorney for the Southern District of New York Preet Bharara, Principal Deputy Assistant Attorney General Stuart Delery, Legal Advisor to the State Department (and former Yale Law School Dean) Harold Koh, and others -- Official High Muckety-Mucks of Obama Administration Justice and of Elite Progressive Legal Wisdom.  In expressing the interest of the United States in weighing in on the matter, they state one view of how the world works:  

[T]he decision could harm U.S. interests in promoting issuers’ use of New York law and preserving New York as a global financial jurisdiction. See Allied Bank v. Banco Credito Agricola, 757 F.2d 516, 521 (2d Cir. 1985) (“The United States has an interest in maintaining New York’s status as one of the foremost commercial centers in the world.”). The decision could encourage issuers to issue debt in non-U.S. currencies in order to avoid the U.S. payments system, causing a detrimental effect on the systemic role of the U.S. dollar.

The Second Circuit's opinion comes from Barrington Parker, Rosemary Pooler, and Reena Raggi.  They say: 

We believe that the interest—one widely shared in the financial community—in maintaining New York’s status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts. 

Well, both can't be right.  I'll go with the Second Circuit, thank you.  Congratulations to Judges Parker, Pooler and Raggi on bucking progressive groupthink at least on this one not-so-small point.

The Mayoral Candidates Will Never Get Down To Substance

Further proving my point that the Democratic candidates for Mayor have no interest in dealing with the substance of the job, there was a debate on Wednesday evening, sponsored in part by the Campaign Finance Board, and broadcast on the local cable news station NY1.   It was covered yesterday by multiple news outlets, including NY1 here, the Post here, and the Times here.

The Times piece, by Michael Barbaro and Michael Grynbaum, is a classic case of political coverage at its most vapid, treating the event purely as a matter of the scoring of debating points without ever mentioning what issues came up or what any candidate had to say on any issue.  Do yourself a favor and don't read it. 

The brief NY1 piece is little better, but does mention that the main topics of discussion were "stop and frisk and health care issues."  "Stop and frisk" is at least a bona fide issue in the race, although all the Democratic candidates seem to agree about it, namely they are against it.   On the health care front, the debate was not about Medicaid overspending or the implementation of Obamacare.  Rather, it was about the thoroughly quixotic subject of hospital closures.  See more here.  Well, if you think that the next mayor can actually do something about hospital closures by the expenditure of public moneys and you are going to vote on that basis, you deserve what you get.  The next mayor may spend some money on this, but all the gold in Fort Knox is not going to change the disastrous economics of the hospitals.

And how about unsustainable spending on pensions and healthcare for city workers?  Only Nicole Gelinas in the Post is on to the fact that these things are even issues. 

[P]ublic-sector health- and pension-benefits costs will rise to $20 billion a year by the middle of the next mayor’s term, $3 billion more a year than today.  Yet the candidates were mum on these issues.

So can't the moderators at least put a question or two to get the candidates to address the main parts of the job? 

True, no moderator asked about [worker healthcare and pension issues] directly.

To even be part of the discussion here in New York, you must accept the proposition that we are operating here with infinite tooth fairy money.  Detroit?  Chicago?  Never heard of them! 

Is Bringing Back Our Hospital Really The Most Important Priority For Greenwich Village?

Here in Greenwich Village we are moving into the high political season.  For some reason, all of our local elections (Mayor, Comptroller, Public Advocate, Borough President, City Council) come up in this odd off-year.  Although the final elections are in November, the Republican candidates are almost never competitive except in the race for Mayor, so the real elections for all the other offices, and maybe for Mayor as well, are the primaries on September 10.  That's just a few weeks away.  So the streets and subway entrances frequently have campaign workers, and sometimes candidates themselves, handing out literature and pitching for votes.  

As readers here know, the view of the Manhattan Contrarian is that far and away the most important issue facing New York City voters and politicians is unsustainable overspending in a few key areas, most notably education, Medicaid, and pensions and healthcare for city workers.  In the pensions area, most city workers (e.g., teachers, transit) can retire by age 55, and some (e.g., police, fire) by age 45, meaning that as the workers age and retire we are heading for a situation of paying more retired workers than active.  And as of now, the city both pays generous guaranteed pensions for retirements of up to 50 years, and also picks up the full healthcare for the workers from retirement to Medicare, and the non-Medicare portion thereafter.  The costs are spiraling out of control, and rapidly crowding out any and all other spending priorities, while also putting upward pressure on taxes.  Outgoing Mayor Bloomberg rather loudly warned about the problem in a significant speech just a couple of weeks ago.

Despite that, and despite the warning bells loudly ringing in places like Detroit and Chicago, you can scour everything you can find in the websites and campaign literature of the candidates for all offices in the Democratic primaries and find not a mention of these problems.  Instead, if as a conscientious downtown citizen you follow the races as presented by the candidates, you will quickly come to the conclusion that far and away the most important issue for Greenwich Village is the closure of our local hospital. 

First, some background.  Until recently there was a large and well-equipped (but not very well-managed) hospital, St. Vincent's, in the heart of the West Village at Seventh Avenue and West 11th Street.  This is just a couple of blocks from where I live.  St. Vincent's ran into financial problems after 2000 and proceeded to have two bankruptcies in quick succession.  In the Chapter 22 (bankruptcy lawyer jargon for second bankruptcy right after the first) St. Vincent's presented a plan to rescue itself by demolishing the buildings on the main part of its site and building a new state-of-the-art facility on the smaller part of the site across the street.  But that plan was stymied by community opposition, led by the actress Susan Sarandon and her then boyfriend Tim Robbins.  With its rescue plan stuck, the hospital abruptly closed in 2010 and the main part of the site was sold at auction to a condo developer.  Most of the buildings were demolished in 2012, and today there is a big hole in the ground where foundations are in the works for a couple of hundred new high end condos.

For literally all of our local candidates, this is way the most important issue of the moment.  In our City Council race to replace Christine Quinn (term limited and running for Mayor), we have Yetta Kurland and Corey Johnson.  Kurland seemingly can mention nothing but the hospital, and how she has fought to save it.   In Johnson's list of issues, it is well toward the top.  In the Manhattan Borough President race, downtown favorite candidate Julie Menin also seems to be all about the hospital.  A piece of campaign literature received from her two days ago mentions the hospital as the only issue:  "Julie Menin is the only candidate for Borough President who said NO to converting St. Vincent's Hospital into Luxury Condos. . . .  When others caved in to big developers, Julie Menin stood up to fight for St. Vincent's Hospital."

On my way to work on Tuesday, passing by the St. Vincent's site, I ran into a rally for mayoral candidate Bill de Blasio.  The rally was all about saving this and several other hospitals (two in Brooklyn are also in the throes of closure).  Daughter Emily was along to take some pictures: 

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There seemed to be about 100 or so people there.  Kurland was one.  Here is mayoral candidate de Blasio speaking:

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A plurality of participants had signs or tee-shirts with the logos of the SEIU or Nurses Union.  Signs read “Save Our Hospitals” or “Hands Off Our Hospitals.”

In that middle picture, check out that back of the head with dyed red hair just in front and to the right of de Blasio.  Could it be . . . Susan Sarandon?  Yes!  She was there, and the New York Post had some fun with the fact that she somehow has gone from lead opponent of all prior realistic plans to save St. Vincent’s to now believing that the most important thing in the universe is using taxpayer money to resurrect St. Vincent’s from the dead.

The actress plans to join mayoral candidate Bill de Blasio and a star-studded cast for a rally today blasting the shuttering of St. Vincent’s Hospital in the West Village.  But it seems the liberal leading lady has forgotten how she and then-partner Tim Robbins rallied years ago against the hospital’s expansion several blocks from their home on West 12th Street.  Just a few years ago, in 2008, Sarandon blasted the medical center “as a last resort” during a city landmarks hearing on the hospital’s proposed expansion.  “I would not want to bring my children there,” she added during the testimony, in which she asked the city “to slow down here and look at what the alternatives are.”

St. Vincent’s, which served a large homeless population and was the city’s third-oldest hospital, closed in 2010 after going broke. A planned expansion that St. Vincent’s administrators hoped would save the hospital failed — in part thanks to vocal opposition from Sarandon and others.

This is just one more illustration of why I cannot understand Manhattan orthodoxy of the Greenwich Village strain.  Now don’t get me wrong – it’s pretty good to have a big hospital a couple of blocks from your home.  It could be very useful if, for example, you suddenly find yourself having a stroke.  But can we be a little realistic here?  With St. Vincent’s closed, the next closest hospital is Beth Israel, just about a mile away at Second Avenue and 16th Street.  And then there’s Bellevue, a mile and a half away at First Avenue and 27th Street; and NYU, a mile and three-quarters away at First Avenue and 32nd Street; and St. Luke’s/Roosevelt, two and a quarter miles away at Tenth Avenue and 59th Street.  And I could continue.  An article here on Wikipedia lists 20 currently-operating hospitals on our 23 square mile island.  In sparsely populated upstate, there are places that are easily 50 miles from the nearest hospital.  A new state-of-the-art hospital in Manhattan could run $1 billion or so.  There is no possible way that any responsible state legislature could divert that kind of money from other needs so that people in the very wealthiest neighborhood in the whole state can be spared having to go all of one mile to the nearest hospital.  This hospital is not coming back in our lifetime.  Can’t any one of our politicians level with us on this?

It’s like a big exercise in sleight-of-hand, where our attention is diverted to things with emotional impact about which nothing can be done, while we completely miss the huge issues that must be addressed and can actually be fixed.  I guess a second possibility is that these politicians are themselves completely unaware of the budget issues.  Actually, that second possibility is more likely, and more scary.

NOTE:  Apologies for having this article up in incomplete form for the past couple of days.  For some reason, the Squarespace site has completely refused to accept the pictures, and several hours of effort have failed to fix the problem.  I'll keep trying, but meanwhile you'll have to use your imagination.