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Three Things I Think I Think – Weekend Edition

Here are some things I think I am thinking about:

1 – The Department of Labor’s Fiduciary Rule is Already Working. There was a bit of an uproar this week when Skybridge Capital’s Anthony Scaramucci said that Donald Trump would repeal the Department of Labor’s new fiduciary rule arguing that it’s nothing more than another onerous regulation that won’t achieve its goals. In case you haven’t been following this closely, the DOL’s new rule would apply a standard of care to all financial adviser’s ensuring that they are more transparent in the process of doing what’s in the best interest of their clients.

I’ll be blunt about this – I don’t think the rule itself is going to change things that much. But you know what is having a huge impact? The fact that this is a discussion at all. The reason why this rule is a good thing is because the idea of a “fiduciary” is now becoming one of the most important parts of the financial adviser vetting process. When someone is searching for a financial adviser this is fast becoming one of the first questions asked. “Are you a fiduciary?” “What are your conflicts of interest?”. If you can’t answer those questions clearly and succinctly you’re at a huge disadvantage as it appears that you might not be working in the best interests of your clients.

So, is the rule going to layer on more red tape and make business more difficult for some advisers? Yes. And who cares. If your adviser can’t say they’re a true fiduciary or that they don’t have serious conflicts of interest then the market will price them out of the equation over time.  And that’s a good thing for all of us.

You can read Scaramucci’s opinion here. Here’s an opposing view from Tim Maurer.

2 – Paul Volcker Botches Government Debt, BIGLY.¹  Here’s Paul Volcker in the NY Times arguing that the national debt is a huge long-term problem. He’s not necessarily wrong, but regular readers know I’ve done a huge amount of work on this issue over the last 8 years and I would put my track record on this issue up against anyone’s in the world. I’ve consistently stated, in operational terms, why the USA’s national debt problem was overstated by the debt fearmongering crowd and I’ve laid out in clear terms why these arguments were wrong.  Unfortunately, Volcker reiterates many of the most common myths in today’s piece and in doing so I think he seriously damages the potential for more effective policy. This is directly hurting US economic growth as fear of the debt outweighs potential policy implementation that could be helpful.

Here’s the key section which has been almost entirely debunked by now:

“Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad.”

The first paragraph claims that we can’t control our own interest rates on the national debt. This is factually wrong. As the monopoly supplier of reserves and the setter of the interest on reserves, the Fed has absolute control over the overnight rate. If the US Treasury decided to issue nothing but 30 day notes the interest on the US government debt would be effectively controlled by the Fed’s rate setting policies. Even in the case of a high inflation the Fed wouldn’t be forced off of this price setting target (though they would probably be wise to do so). But that would be a welcome event in today’s near deflationary environment. Higher rates of inflation and marginally higher interest rates would be a good thing for the aggregate economy!

The second paragraph is the classic crowing out argument. That’s the idea that more government debt leads to higher interest rates. You literally have to have been asleep for the last 30 years to think this is true. After all, the two data sets have been almost perfectly inversely correlated over this time. If anything, it seems like more government debt drives interest rates DOWN.

Now, don’t get me wrong. There is a real risk in too much government debt. It could contribute to unproductive work and/or higher inflation.  But that would be a huge welcome development at this point. If inflation “normalized” then growth is presumably normalizing as well. Who wouldn’t love to see 3% inflation with 6% NGDP at this point? That would be a huge positive development for the US economy and at that time we can start fear mongering about too much government debt. But until then these discussions about the long-term debt problems are counterproductive.

Anyhow, I’ve rambled on about this endlessly for almost a decade now. I’ll let you explore these myths more thoroughly here if you’re interested.

3 – I found the cause of the Decline in Productivity! The decline in productivity has been confusing economists for the last decade. But it’s pretty obvious and I have empirical evidence of the cause. It’s dogs. 100% dogs. You see, here’s my dog rolling in this freshly delivered mulch at my house. I am just trying to shovel this into a wheel barrow and the dog is in my way just rolling around like no one’s trying to work here. And it dawned on me that this was a huge problem. Millions of Americans are dealing with this problem where dogs are getting in the way of their productive lives on a daily basis.  I don’t know what to do about this. My wife wants to get another dog. I think she’s probably right.

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Cheers to the weekend! I hope you’re having a good one.

¹ – Regardless of who wins this election I will always be thankful for Donald Trump’s unintentional creation of the word “bigly”. Yeah, I know he really says “big league”, but bigly is a wonderful word and I hope it becomes a part of everyone’s common jargon.  

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