Is the U.S. Becoming a Banana
Republic?
by The Curmudgeon
"This is
the United States of America; we’re not some banana republic. This is not a
deadbeat nation. We don’t run out on our tab. We're the world's bedrock
investment, the entire world looks to us to make sure the world economy is
stable. We can’t just not pay our bills." President
Barack Obama said last month. You can watch a video of Obama's statement here.
What's a banana
republic anyway? Wikipedia's definition seems to be the most contemporary
use of the term: "A political
science term for a politically unstable country whose economy is largely
dependent on the export of a single limited-resource product, such as bananas.
It typically has stratified social classes, including a large, impoverished
working class and a ruling plutocracy that comprises the elites of business,
politics, and the military. This politico-economic oligarchy controls the
primary-sector productions and thereby exploits the country's economy."
A National
Review article
had this to day about the U.S. drifting toward becoming a banana republic
(contrary to Obama's statement above):
"When
you’re the guys who print the global currency, you can run up debts undreamt of
by your average generalissimo. Raising the debt ceiling (many times) suggests
that spending more than it takes in is now a permanent feature of American
government. And no one has plans to do anything about it. Which
is certainly banana republic-esque."
"As the
old saying goes, bank robbers rob banks because that’s where the money is. But
the smart guys rob taxpayers because that’s where the big money is. According
to the Census Bureau’s latest "American Community Survey," between
2000 and 2012 the nation’s median household income dropped 6.6 percent. Yet in
the District of Columbia median household income rose 23.3 percent. According
to a 2010 survey, seven of the nation’s ten wealthiest counties are in the
Washington commuter belt."
"But
Washington does nothing but government, and it gets richer even as Americans
get poorer. That’s very banana republic, too: Proximity to state power is now
the best way to make money. Today, the ambitious man finds a big
money-no-object bureaucracy that likes to splash the cash around and there
builds his lobbying group or consultancy or social media optimization strategy
group."
In January
2013, The Atlantic published an article titled: Is
the U.S. on the Verge of Becoming a Banana Republic?
Here's an intriguing quote from that
piece:
"So
really, it's pretty unfair to suggest that failure to raise the debt ceiling
would make the United States a banana republic. Most banana republics have
their affairs in much better order than that."
Does that imply
that the economic affairs of the U.S. are WORSE than that of a banana republic?
The comments below the article express very interesting reader point of views
that transcend Congressional battles over raising the debt ceiling.
In an e-mail to
clients, Jonathan Lewis, chief investment officer at Samson Capital Advisors listed
the Top 5 Ways to Know if a Country Might Be a Banana
Republic:
1. There is a
flight from your T-bill market because the government might not be able to pay
its debt.
2. Corporate
debt looks more attractive than debt issued by the government.
3. The
government can’t release data on the economy because the government workers who
collect and distribute the data have been furloughed.
4. The leaders
of the country have lost the ability to compromise and discuss important policy
matters in an open, fact-based manner.
5. Important
futures exchanges begin to aggressively haircut your government debt when it is
used as collateral for futures contracts.
Victor
Sperandeo ("the man for all markets") compares the U.S. to Hong Kong
in this essay:
"In 1903,
the total U.S. government spending (federal, state, and local) was 3% of GDP.
It recently got to over 44% and has declined to about 41% - still incredibly
high. Up until 1913 income taxes did not exist. The maximum personal income tax
rate has changed
dramatically (up and down) since then. Currently, the top individual income
tax rate is the top rate is 39.6 % + a Medicare tax of 2.35% or 3.8% for the self-employed."
"For comparison,
Hong Kong government spending is only 9% of GDP (Source: World Bank) and the
maximum income tax rate is 15% - with a 0% capital gains tax (Source: Inland
Revenue Dept-GovHK). In addition, business
registration fees for 2013-14 are waived."
Notes:
1. There's also the dreaded and draconian Alternative
Minimum Tax (AMT) in the U.S. that hits ever more Americans - in lower tax
brackets -who have to pay a much higher tax rate, as many deductions on 1040
Schedule A (e.g. state taxes and miscellaneous
expenses) are disallowed under AMT.
2. Other countries are taxed higher (and some
lower) than the U.S., as you can see from this table.
Sperandeo
continues, "My view is that U.S federal spending should be reduced to 15%
of GDP with HK equivalent taxes, much less government regulation and a return
to the constitution law. I'm afraid it
is only a dream as it likely will never happen."
Commenting on
whether or not the U.S. is a banana republic, Victor wrote:
"I cannot
agree that the US is a banana republic today or even close to it. True, the U.S. primarily exports one dominant
product - "paper fiat money."
But in truth, the U.S. is headed for a monetary crash, which will truly
wreak havoc on the global economy. That will result in hyperinflation, in my
view. But right now, the U.S. is a
former great free country that is going from the Welfare State to
Socialism."
The Mother of All Conundrums?
The CURMUDGEON
is very confused about how a country with such a dysfunctional government (with
never ending rancor, acrimony and hostility in our nation's capital) and a
relatively weak economy can still have: 1.) a stable currency and 2.) an incredibly strong stock market.
1. Well known economist Henry Kaufman said this
week, “The U.S. dollar is the key reserve currency, and there is no immediate
alternative to it. Not the yen, not the euro, not the Chinese currency.”
Floyd Norris
pointed out in his Saturday's NY Times column:
"The U.S.
borrows in its own currency, and it borrows at extremely low interest rates. It
also borrows under its own laws, an often overlooked advantage. Such a
situation makes default — or at least involuntary default — impossible because
the government can print dollars if need be. The value of the dollars it repays
may be less than the value of the dollars it borrows, but that is a risk the
lenders accept."
But if threats
of debt default become acceptable in pursuit of partisan political advantage,
then Norris believes "the unique position of the United States could erode
or even vanish."
2. Norris' Saturday column
was even more of an eye opener! Norris
notes that near the end of 2010 (when QE went into effect), the United States
began to do better than most markets, and that advantage accelerated in the
summer of 2011 and then again (after QE infinity was announced) in Sept.
2012. This past Wednesday, exactly six
years after the peak, only two of the 15 largest stock markets in the world
were higher than they had been at the 2007 peak: Switzerland and the U.S. Over
all, the index for stocks outside the United States was 22% lower than
it had been on Oct. 9, 2007, while the U.S. was up 7% from its pre-crash
all-time high. This can be seen in the
chart at this link:
Closing
Comment:
The CURMUDGEON
leaves it to readers to form their own opinion about whether the U.S. is
becoming a banana republic, based on the comments and checklist noted
above.
We invite
readers to email an explanation of why -with all the negatives in the economy
and government- the U.S. stock market has outperformed almost all others since
Oct 2007. Could the market's strength
and resiliency be due entirely to the Fed's ultra-easy monetary policies? Could the U.S. equity market be manipulated
-by big players buying stock index futures and high volume ETFs?
Comments are
also invited on whether the U.S. $ will continue to be the world's reserve
currency- even with its exponentially increasing debt, with seemingly endless
budget and debt ceiling battles.
Till next time.....................
The Curmudgeon
ajwdct@sbumail.com
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.