Social Security Is Dying Because Baby Boomers Aren’t

By John Mauldin


I’m filing this letter on the day I turn 70 which, among other things, means I start receiving Social Security benefits this month.

The good news, at least for me, is I am getting a whale of a deal from Social Security compared to later generations. Frankly, I was surprised at my monthly benefit amount, because I never really paid attention to what it would be. That one payment will put me and Shane within shouting distance of the US median household income, and I am still working. It’s a far cry from my humble roots. I have been both blessed and lucky.

Unfortunately, my good news is also bad news for younger Americans, who won’t get nearly as much as my age cohort is collecting. Worse, they could actually see negative real returns despite having paid proportionally more into the system. In investment terms, they are getting screwed.

This is not a good situation, obviously, and is even more frustrating because it’s easily fixed. Back in 2006, Alan Greenspan said a group of experts could easily fix Social Security in about 15 minutes “only because 10 minutes was used for pleasantries.” And he had actually led such a group decades earlier: the 1981 Greenspan Commission which Ronald Reagan formed to recommend fixes to the system that was ailing even then.

Fixes for today’s problems are elusive because change is politically hard, especially when it requires sacrifice. But, as we will see, the sacrifice is going to happen anyway if we do nothing. You can’t take blood from a turnip and that’s what Social Security is becoming. Our present course will make the end (in the not-too-distant future) far uglier than it has to be.

Today we will discuss this exasperating situation, using my own situation as a convenient example. As you will see, the Social Security system is not working as intended. Its internal contradictions will soon be undeniable.

Off the Rails

Social Security is a textbook illustration of how government programs go off the rails. It had a noble goal: to help elderly and disabled Americans, who can’t work, maintain a minimal, dignified living standard. Back then, most people either died before reaching that point or didn’t live long after it. Social Security was never intended to do what we now expect, i.e., be the primary income source for most Americans during a decade or more of retirement.  

Life expectancy when Social Security began was around 56. The designers made 65 the full retirement age because it was well past normal life expectancy. No one foresaw the various medical and technological advances that let more people reach that age and a great deal more, or the giant baby boom that would occur after World War II, or the sharp drop in birth rates in the 1960s, thanks to artificial birth control. Those factors produced a system that simply doesn’t work. A few modest changes back then might have avoided today’s challenge. But lacking a time machine to go back and make them, we are left with a crazy system that rewards earlier generations at the expense of later ones.

I am a perfect example. I’ve long said I never intend to retire, if retirement means not working at all. I enjoy my work and (knock on wood) I’m physically able to do it. As presently configured, Social Security let me delay collecting benefits until now, in exchange for which I will get a higher benefit—$3,588 monthly, in my case.

It turns out that when you file for Social Security benefits you get a call from the Social Security Administration verifying your details. I got mine this week. They asked why I had no income in 1981 and 82, as well as 1990. The simple answer is those were recession years and I didn’t make money. But in 81–82, a self-employed person could deduct everything that moved and a lot that didn’t. I actually had cash flow in those years but deductions took my taxable income to zero. 1990 was just a pretty ugly year.

(Sidebar: My research associate Patrick Watson, who helped with this letter, actually worked for me in 1990 in Arlington, Texas. Because he was an employee, he actually paid more Social Security taxes that year than I did. Again, I had enough cash flow and savings to make all the normal payments and keep the kids in school.)

Looking back over the years on the Social Security form was a trip down personal memory lane. There was the random over-the-top year followed by subpar ones. I spent some time reviewing what happened in all those years. But my income mostly rose over time, except in the early 2000s when I launched a new business that consumed every penny I had. Income-wise, not a good few years, but long-term, one of the best things I’ve ever done.

Personal note: I came from the wrong side of the tracks in Bridgeport, Texas, except that Bridgeport was too poor to have tracks. I started actually working at age 11, doing door-to-door sales and paper routes. I mostly worked odd jobs but at 16 actually got a paycheck and Social Security says I made $979 that year. I basically got room and board growing up after age 12. I bought my own clothes and everything else. Just what we did. Never thought anything of it. That $979 is $7,662.19 in 2018 dollars. Inflation was just beginning to kick in and in the next 54 years truly eroded the value of that first $979.

I was lucky and got a full tuition scholarship to Rice University, and loans at 3% interest for room and board, though I still had to work throughout college for everything else. I went to seminary, earned a Master of Divinity (that and four dollars will get you a cup of coffee at Starbucks), and went into business for myself shortly thereafter. In the late ‘70s and early ‘80s there were times I woke up at night wondering whether to pay the electric bill, buy groceries, or pay a business invoice. I actually had a bank account in North Dakota (I think it was) that I would write checks on because I knew it would take almost two weeks to clear. I ran my payables to 60+ days because my customers ran me to 60-90+. It was the best business school education ever. Real world, not hypotheticals.

A lot of people would look at my life today and not understand that I really get tough times and doing what you have to do just to get by. People just assume that somehow it has always been rainbows and unicorns for me. And it pretty much has been a great life. But being forced to build from the literal ground up made me truly appreciate my blessings.

Now, back to Social Security.

Your Social Security Return on Investment

 
Now, that $3,588 I will be getting each month isn’t random. It comes from rules that consider my lifetime income and the amount of Social Security taxes I and my employers paid. That amount comes to $402,000 of actual dollars, not inflation-adjusted dollars. More on that later. (I also paid $572,000 in Medicare taxes. Again, actual dollars, not inflation-adjusted dollars.) I first paid into Social Security and Medicare in 1966. For most of my life I’ve been self-employed, so I paid both sides. (Economically speaking, everyone does. Employer contributions are part of your compensation, even though you never touch them.)

What did those taxes really buy me? In other words, what if I had been allowed to invest that same money in an annuity that yielded the same benefit? Did I make a good “investment” or not?

That is actually a very complicated question, one that necessarily involves a lot of assumptions and will vary a lot among individuals. But my friend Larry Kotlikoff’s Maximizer software helps. According to his calculations, if I live to age 90 (a good bet since my parents and grandparents on average did a lot better) and benefits stay unchanged (not such a good bet, as we’ll see below), the internal real rate of return on my Social Security “investment” will be 3.84%. If I only make it to 80, that real IRR drops to 0.75%.

While this may not sound like much, it actually is. Even 1% real return (i.e., above inflation) with no credit risk is pretty good and 3.84% is fantastic. If I live past 90 it will be even better.

Alas, this is not due to my investment genius. According to Larry Kotlikoff, four things explain my high returns.

  • Double indexing of benefits in the early 1970s (thank you, Richard Nixon).

  • I delayed claiming benefits until age 70, which I could afford to do but isn’t an option for many people.

  • I will probably live longer than average, due to both genetic factors and maintaining good health (thank you, Shane!).

But maybe most of all because

  • The system is massively screwing the next generation. From a Social Security benefit standpoint, being an early Boomer is a pretty good deal.

Social Security structurally favors its earliest users. The big winners are not the Baby Boomers like me, but our parents. They paid less and received more. But we Boomers are still getting a whale of a deal compared to our grandchildren.

Larry ran another hypothetical case for me. Consider a male who is presently age 25, and who earns $50,000 every year from now until age 67, his full retirement age. Such a person is not going to get anything like the benefits I do. The money won’t be there, necessitating benefit cuts Larry estimates will be 24.5%. That will be politically unpopular, to say the least, so Congress will likely change the law first, but things will clearly have to change.

So, if this person lives an average lifespan and gets only those reduced benefits, his real internal rate of return will be -0.23%. I suspect very few in the Millennial generation know this and they’re going to be mad when they find out. I don’t blame them, either.



The reason Millennials won’t see anything like the benefits today’s retirees get is simple math. The money simply isn’t there.

The so-called trust fund (which is really an accounting fiction, but go with me here) exists because the payroll taxes coming into the system long exceeded the benefits going to retirees. That is no longer the case. Social Security is now “draining” the trust fund to pay benefits. This can only continue for so long. Projections show the surplus will disappear in 2034. A few tweaks might buy another year or two. Then what?

Well, the answer is pretty simple. If Congress stays paralyzed and does nothing, then under current law Social Security can only pay out the cash it receives via payroll taxes. That will be only 77% of present benefits—a 23% pay cut for millions of retirees.

This has been building for a long time. Look what Alan Greenspan said in 1996.

As longevity improved far beyond that contemplated by the creators of the system, and productivity growth slowed after 1973, the original premise of the system of intergenerational balance began to fail. Today the official unfunded liability for the Old Age, Survivors, and Disability funds, which takes into account expected future tax payments and benefits out to the year 2070, has reached a staggering $3 trillion.

 
That $3 trillion Greenspan found so staggering is mere pocket change now.
 
Social Security’s unfunded obligations on what they call “infinite horizon” (the entire future) are a staggering $43.2 trillion, according to the 2019 Trustee’s report.

We can fill that hole by raising FICA “contributions,” benefit cuts, or some combination of both. We could also raise the retirement age. This would simply stabilize the system, not enhance it. But anything less means going deeper into the hole.

And please understand, there is no trust fund. Congress already spent that money and must borrow more to make up the difference.

Again, let me stress: This IS going to happen. Math guarantees it. You might say a huge benefit cut will bring riots in the streets, starving seniors, and assorted other ill effects. You’re probably right so we should obviously do something. Instead, we—both voters and elected officials—are doing nothing at all despite the mathematical certainty that catastrophe is coming 15 years from now. Would we be similarly paralyzed if a world-ending asteroid were approaching on the same timetable?

Anytime I bring up benefit cuts, I hear indignant cries: “I earned that money!” Let’s talk about that.

Social Security looks a lot like some kind of insurance plan or annuity. We put money in now, we get money out later, according to some formula. A complex and unfair formula, as described above, but there is a method to it.

The vast majority of workers view Social Security as a kind of moral promise. We did our part and we deserve to get what we were assured would come. But as a legal matter, that’s not what it is. Our FICA “contributions” are really a tax. The Supreme Court ruled on this in the 1960 Flemming vs. Nestor case, which established no one has a legal or contractual “right” to Social Security benefits.

I don’t think this is a design flaw. I suspect FDR and team thought it would constrain future congresses from disassembling their creation. If so, they were right. But it’s also caused anxiety that prevents Congress from making important repairs to the program.

These challenges will get worse, not better, if the life extension technologies I anticipate reach the market in the 2020s. If you think Social Security is unsustainable now, wait until 100-year lifespans are commonplace. My personal IRR goes up even more if I live to 100 or more. Assuming I still get paid…

Missing Opportunities

These problems would be somewhat less serious if more people saved for their own retirements and viewed Social Security as the supplement it was intended to be. There are good reasons many haven’t done so. Worker incomes have stagnated while living costs keep rising.

But more important, telling people to invest their own money presumes they have investment opportunities and the ability to seize them. That may not be the case. The prior generations to whom Social Security was so generous also had the advantage of 5% or better bond yields or bank certificates of deposits at very low risk. That is unattainable now. And let’s not even talk about mass numbers of uninformed people buying stocks at today’s historically high valuations. That won’t end well.

So, if your solution is to put people in private accounts and have them invest their own retirement money, I’m sorry but it just won’t work. It will have the same result as those benefit cuts we find so dreadful: millions of frustrated and angry retirees.

So, what is the answer if you are in retirement or approaching it? The easiest answer is to raise the retirement age. Yes, that’s really just a disguised way to cut benefits, but making it 70 or 75 would get the program a lot closer to its original intent. Today’s 65-year-olds are in much better shape than people that age were in 1936 or even 1970.

(Note, I would still preserve the option for people who are truly disabled to retire younger. I get that not everybody is a writer and/or an investment advisor who makes their living in front of the computer or on the phone. Some people wear out their bodies and really deserve to retire earlier.)

I think the best choice is also the simplest: Don’t retire as long as you are physically able to do things that generate income. It doesn’t have to be back-breaking labor. Find an occupation that fits your skills and health conditions. Keep your spending under control, pay off debt, and save all you can.

Second, since Social Security is still here, make the most of it. Your benefits aren’t etched in stone. There are things you can do to maximize your benefits. Larry Kotlikoff's software Maximizemysocialsecurity.com program costs $40 and can potentially raise your lifetime Social Security benefits by many thousands of dollars. Run it before you make any Social Security moves.

Larry’s MaxiFiPlanner.com, costs $99 and will find additional tens of thousands of dollars of safe ways to raise your lifetime spending power. MaxiFi includes Social Security optimization, so no need to buy both. I write to you a lot about navigating the stock market. But these tools can make you money with no risk whatsoever. For $40 or $99, they can produce a huge return for sure!

Third, and perhaps most important. If you’ve been blessed in life like me, remember that not everyone had your advantages, and particularly the younger generations. Find ways to help them. That doesn’t have to mean giving them money; your wisdom and advice might be even more useful. But to the extent you can, offer a hand to those who need it.

Quick business mention: If you would like to find out what types of investments I think are interesting given my outlook, I invite you to visit Mauldin Securities and find out what my “Team Mauldin” network can do for you. We work with investors at all net worth levels, and who may be looking for either total wealth management or specific opportunities that fit my philosophical framework. There are a number of private partnerships and offerings that I find very intriguing, especially those that are geared toward producing income. (In this regard, I am president and a registered broker with Mauldin Securities, LLC, member FINRA and SIPC. I am also an investment advisor working with CMG.) Find out what my network and my partners at Team Mauldin can do for you.
 

“The good news is your retina is not detached. There is a slight tear but we can fix it with a laser in just a few minutes.”

Wednesday night I learned I might have a detached retina. My personal doctor, Mike Roizen at the Cleveland Clinic, said it was quite urgent. I was remarkably lucky to get into one of the best ophthalmologists in Puerto Rico the next morning, top of her class at Harvard and Johns Hopkins. Turns out she is my neighbor here in Dorado and her specialty is retinas.

My sister lost sight in one of her eyes with a detached retina, so I was very nervous. The doctor worked very hard to keep me calm but she clearly did not want me to leave until she “tacked down” the area with laser surgery around that tear.

So, I wake up Friday morning to finish this letter, my eye feels great and I feel even more blessed. And then I get letters like this in my inbox from my longtime friend Art Bell, CPA, advisor and friend to many of the largest money managers in the world, who has always been free to lend me his wisdom. Here is just the first part of his letter.

Oh my, another milestone birthday! I happily recall your 60th in 2009 and wish you well on this one, what is for you the “new 50!” You have lived every moment of your years, with joy and some with sadness, tested but never broken. You never let the highs fool you or the lows stop you; you made many friends and very few who took the low road. You wrote everything from books to emails to blogs to articles to newsletters and gave talks and speeches with fury and passion. You weren’t always right in your interpretations and predictions, but if not right you wondered how the world could get it so wrong! You loved kids so much you adopted many without regard to origin or color, you loved women so much you married a few, proving sequentially is better than all at once. You stared down government agencies and tolerated their heavy hand when no amount of education would still them. So, start a new decade tomorrow, maybe a book of reflections, maybe a month with an Indian prophet in India or an Indian prophet in South Dakota….

 
I am grateful to have so many friends who make life a wonderful joy. And so many readers like you with me every week for the last 20 years. I hope you and I can walk another 20 together. I fully intend to.

And with that I will hit the send button. You have a great week. And reach out to a few friends and just share some time with them.

Your so grateful for everything analyst,

 
John Mauldin
Co-Founder, Mauldin Economics

Negative rates are tarnishing central bankers’ halos

The failures of loose monetary policy could prompt a fall from grace

Merryn Somerset Webb

Mario Draghi, president of the European Central Bank (ECB), attends the central, eastern and south-eastern European economies (CESEE) conference at the ECB headquarters in Frankfurt, Germany, on Wednesday, June 12, 2019. International Monetary Fund leader Christine Lagarde called on governments to de-escalate current trade disputes and instead work to fix the global system. Photographer: Andreas Arnold/Bloomberg
The ECB's outgoing president Mario Draghi acknowledged the downsides of quantitative easing are becoming 'more visible' © Bloomberg


Who do you blame for the last great financial crisis? Just off the top of your head. I bet the phrase that pops up first is “the banks”. If it isn’t that, it will be something to do with whoever invented subprime mortgages or started “slicing and dicing” risk.

Unless you are a finance professional, it will not be the regulatory or rate-setting failures of central bankers. In the past decade, they have mostly been portrayed as the saviours of the global economy. Forced by the widespread political failure to provide fiscal stimulus, central bankers went into overdrive and tried to do everything themselves, showering the global economy with easy money and saving the world, and, in European Central Bank president Mario Draghi’s case, the euro.

Their use of quantitative easing might have merged fiscal and monetary policy together. (By raising asset prices artificially, QE has wealth distribution implications.) It might have looked more than a little political: the euro is a political project, so doing “whatever it takes” to save it is also political. And it might have some negative side effects but, the story goes, at least monetary policy did its job of preventing a global meltdown.

But now the problems they created are becoming obvious, as even Mr Draghi noted in an interview published earlier this week. “The negative side effects as you move forward are more and more visible,” he said. Indeed they are. Take negative interest rates, something that had almost no precedent when first Sweden, Switzerland and then the ECB deployed them after the 2008 crisis. The Swiss National Bank had charged de facto negative rates on non-resident deposits in the 1970s but that was it.

Negative interest rates undermine a country’s banks and by extension its entire economy. Their impact is visible in the share prices of European banks. The Euro Stoxx banks index is down near the 2012 lows it set during the eurozone crisis. By charging fees for deposits, negative rates turn assets into a kind of liability. That is already visible to some wealthy clients of European banks as well as any one with a business account. There is something shocking about actually seeing interest as a cost set against your cash.

Negative rates also destroy the stability of pension and insurance funds. At a conference in London this week, Peter Spiller of CG Asset Management provided a nasty little example of the damage they can do. Imagine he said that you want to have an inflation adjusted £1 for your retirement in 2068 (49 years away).

You could look to achieve this perhaps by investing in a gilt that matures then. Right now, you would need to put in £2.60 for every £1 you get out. Why? Because that is the compounding effect of investing for 49 years on the miserable minus 2.05 per cent yield that the bond is offering investors today.

The impact may not be as visible as negative nominal rates on deposits but when rates are negative in either real or nominal terms, cash is no longer helpful to anyone saving for retirement. The lower rates go, the more investors feel they must save.

There are less immediately obvious problems stemming from very loose monetary policy. The main one is the huge build up in public and private debt across the developed world (the highest ever in peacetime) and the low quality of much of that debt.

If we were seeing the end of QE and negative interest rates, all these very visible problems could be dismissed as probably temporary and, perhaps, even worth the pain. But we are not.

Mr Draghi is leaving the ECB being hailed as a hero, but he is also leaving it with rates at minus 0.5 per cent and a new round of QE bond buying under way. He isn’t alone: in the month of August, a quarter the G20 central banks lowered their policy rates. And the chat among central bankers is not about how to end it but instead how to make it even more extreme to address the next recession. Chairman Jay Powell recently asked whether the US Federal Reserve should be expanding its tool kit.

Interest rates can go lower. Outside Japan and the eurozone, most are still in positive territory. And central banks can go direct: merging monetary and fiscal policy with various versions of helicopter money. It might work.

But this time it might come back to bite. Most people didn’t notice the role of the central banks in the last financial crisis. Why would they? Old style monetary policy was important but it was also complicated and boring — and hence more or less invisible.

But negative rates are a different thing altogether. While you can explain the problems they create in complicated ways, there is no need to do so. Most people intuitively feel that negative interest is somehow unnatural. If negative rates cause the next crisis by distorting capital allocation and encouraging unmanageable levels of debt, central bankers will discover that the real danger is to them personally. The whole idea that they are politically independent good guys will come tumbling down.

Instead ordinary people will see them as dangerous creatives who set in motion an experiment they have no way of reversing or controlling. Just like the bankers in the early 2000s.


The writer is editor in chief of MoneyWeek

Elliott prepares for downturn with new funding round

Paul Singer’s activist fund is building up a war chest as it expects market disruption

Ortenca Aliaj and Lindsay Fortado in New York

Paul Singer, president of Elliott Management Corp., speaks during the WSJDLive Global Technology Conference in Laguna Beach, California, U.S., on Tuesday, Oct. 25, 2016. The conference brings together an unmatched group of top CEOs, founders, pioneers, investors and luminaries to explore tech opportunities emerging around the world. Photographer: Patrick T. Fallon/Bloomberg
© Bloomberg


Elliott Management, one of the most zealous shareholder activists on Wall Street, is going back to investors for more money just two years after the hedge fund raised $5bn in one day as it prepares for a market downturn.

The $38.3bn activist fund led by Paul Singer has been building up a sizeable war chest to spend on new opportunities, including a $2bn co-investment fund that closed in August to take companies private. 

Elliott could raise a further $5bn in the new funding round, according to an investor familiar with the terms. The hedge fund is using a drawdown structure that will feed into the main fund, an arrangement that is often used by private equity firms but has become more popular among activists. 

In a drawdown structure, investors who agree to commit cash to the fund do not have to front up capital immediately. Instead their investment is called over time as opportunities are identified and no fees are charged until the money is put to work. 

Elliott used the same structure when it raised money two years ago to position itself for market disruption. In a 2017 letter to investors, Mr Singer said the firm wanted to raise funds before investor liquidity dried up. 

An investor who allocated more than $100m to Elliott in the 2017 fundraising called drawdown structures “problematic” and “restrictive”. Allocators had to make sure they could meet their commitments when they were called or face paying a hefty fee, he said. However, many investors were willing to give up liquidity to get early access to well-known managers, he conceded. 

The new capital raising is further indication that Mr Singer is anticipating a market meltdown. 

The billionaire investor, who has been vocal about complacency in global financial markets, recently predicted that the economy was headed for a significant downturn with risk at an all-time high. 

“The global financial system is very much toward the risky end of the spectrum in terms of debt,” Mr Singer said during a panel at the Aspen Ideas Festival in July. “Global debt is at an all-time high, derivatives are at an all-time high and it took all of this monetary ease to get to where we are today”. 

Mr Singer has proven he can play the long game after battling Argentina for more than a decade over its defaulted debt. Elliott struck a deal with reformist president Mauricio Macri in 2016 and collected some $2.4bn from the country, putting an end to a 15-year long legal fight.

Elliott has already put some of the capital it raised in 2017 to work. The hedge fund deployed $3.4bn in the first six months of 2019, according to a report by Lazard, outspending Carl Icahn to take top spot as the most active activist. 

Earlier this month, the hedge fund took on one of America’s largest companies, US telecoms group AT&T. Elliott disclosed a $3.2bn stake in the company as part of a campaign for an overhaul of the business. 

Elliott is up 4.5 per cent through to the end of August, according to a person familiar with the fund’s returns.

The fund declined to comment on the fundraising.


Trump’s Faltering Middle East Coalition

It is not surprising that Saudi Arabia’s international image has suffered in the 12 months since the brutal murder of the Saudi journalist Jamal Khashoggi. But nor is it surprising that, once the storm caused by Khashoggi’s murder had blown over, some familiar regional dynamics reasserted themselves.

Javier Solana

solana108_ Alex WongGetty Images_trump netanyahu

MADRID – On October 2, it will be a year since the brutal murder in Istanbul of the Saudi journalist Jamal Khashoggi. In June this year, a United Nations report concluded that Saudi Arabia was responsible for his death, and that there was “credible evidence” implicating the country’s de facto leader, Crown Prince Mohammed bin Salman (widely known as MBS), in his killing at the Saudi consulate.

It is therefore unsurprising that Saudi Arabia’s international image has suffered during the past 12 months. But nor is it surprising that, once the storm caused by Khashoggi’s murder had blown over, some familiar regional dynamics reasserted themselves.

The most significant setbacks for the Saudi regime over the past year concern the ongoing war in Yemen, one of the main theaters of the regional conflict between Saudi Arabia and Iran. So far in 2019, the United States Congress has adopted several bipartisan resolutions aimed at distancing the US from the Saudi-led intervention in Yemen, which was instigated by MBS himself. Although US President Donald Trump vetoed these resolutions, they show that America’s political class is becoming less tolerant of the Saudi regime’s atrocities, especially since the murder of Khashoggi.

The United Arab Emirates is similarly mindful of the reputational costs that a close alliance with Saudi Arabia currently entails, and, with the added objective of easing tensions with Iran, has proceeded to withdraw most of its troops from Yemen. Strikingly, UAE-supported southern separatists in Yemen recently captured the country’s provisional capital from forces loyal to the Saudi-backed government of President Abdu Rabbu Mansour Hadi. Although the UAE’s moves are unlikely to presage a radical strategic realignment, the Saudi regime is clearly more isolated and weaker than before.

On top of this, Saudi Arabia recently suffered a critical attack against two refineries belonging to state oil company Saudi Aramco. Although Yemen’s Iran-backed Houthi rebels claimed responsibility for the strikes, prominent members of the Trump administration have accused Iran of being directly involved. The attacks affected about half of Saudi Arabia’s oil production (representing 5% of daily world output) and triggered a significant spike in oil prices. This accumulation of setbacks should prompt Saudi Arabia to reconsider its intervention in Yemen – an unqualified foreign policy failure with tragic humanitarian consequences.

But the past 12 months have not all been bad news for Saudi Arabia. Despite the delay in the government’s plans to list Saudi Aramco on stock markets, there have been unequivocal signs that the regime retains the confidence of investors. And in preparation for the long-awaited initial public offering, MBS has installed close partners at the helm of both Aramco and the Ministry of Energy. For the first time, the ministry will be led by a member of the Saudi royal family (MBS’s half-brother).

Moreover, relations between Saudi Arabia and the Trump administration remain warm. Although the US-Saudi alliance goes back 75 years, not all US presidents have shown the same devotion to it. Barack Obama, for example, supported the Saudi-backed coalition in Yemen, but also invested heavily in the 2015 nuclear deal with Iran, which Saudi Arabia opposed. Trump, however, has not only tried to scuttle that agreement by withdrawing the US from it, but also has made no attempt whatsoever to contain MBS’s worst foreign-policy impulses.

There is another regional leader who has taken full advantage of Trump’s complicity, at least up to now: Israeli Prime Minister Binyamin Netanyahu. On the eve of Israel’s recent repeat election, Trump entertained the idea of offering Netanyahu a mutual defense treaty. Netanyahu, meanwhile, doubled down on his promises to annex parts of the West Bank – further proof of his chronic disdain for international law. Yet Trump’s support was somewhat milder this time around, and Netanyahu’s last-minute tactics fell flat: his Likud party won fewer seats than in the previous election five months ago, leaving his political future uncertain.

Although some may regard Netanyahu’s bold declarations merely as campaign braggadocio aimed at diverting attention from the multiple corruption allegations against him, the truth is that expansionism and aggression have been central tenets of his regional policy. Of late, Israel and Iran have clashed repeatedly in Lebanon and Syria, both directly and through Iranian proxy groups. The situation in Lebanon is especially volatile: Israel and Hezbollah have begun to cross red lines, risking another open conflict that could reverberate throughout the region.

Netanyahu already threatened a few years ago to draw the US into a war with Iran. Whereas Obama held firm and insisted on diplomatic efforts that resulted in the nuclear agreement, Trump made the mistake of immediately passing the baton to Netanyahu. And Netanyahu found another ally in former US National Security Adviser John Bolton, whose arrival in the White House precipitated the US withdrawal from the nuclear deal.

But Bolton recently left the Trump administration after a series of disagreements with the president. After all, Trump does not want to become entangled in too many conflicts abroad before the 2020 presidential election. Indeed, he has contemplated negotiating with the Iranian leadership, and at one point even appeared receptive to French President Emmanuel Macron’s plan to alleviate Iran’s financial problems in exchange for the Islamic Republic’s continued adherence to all of its obligations under the nuclear agreement.

If a diplomatic rapprochement with Iran is to have any chance of success, however, Trump must discard the showy, personality-driven approach that he has employed with North Korean leader Kim Jong-un. Moreover, he must stop pursuing contradictory policies – as he did earlier this year when his administration placed sanctions on Iran’s top diplomat, Mohammad Javad Zarif.

Zarif himself attributes Trump’s periodic policy fits to the influence of a so-called B team: Bin Salman, Binyamin Netanyahu, Bolton, and Mohammed bin Zayed, the crown prince of Abu Dhabi. Although the first has so far weathered the Khashoggi storm, the second has been significantly weakened and the third sunk, while the fourth has moved toward the sidelines.

The important question now is whether this weakening of Trump’s anti-Iran coalition will be sufficient to initiate positive change in a region that desperately needs it.


Javier Solana, a former EU High Representative for Foreign and Security Policy, Secretary-General of NATO, and Foreign Minister of Spain, is currently President of the ESADE Center for Global Economy and Geopolitics, Distinguished Fellow at the Brookings Institution, and a member of the World Economic Forum’s Global Agenda Council on Europe.

Time to Worry About Corporate Debt Again

It didn’t look so bad because profits were high, but then the profit figures were revised lower

By Justin Lahart




High levels of corporate debt are suddenly a whole lot more worrisome than they were just a couple of months ago.

U.S. financial account figures from the Federal Reserve released Friday showed the amount of money U.S. companies have borrowed continues to swell. 

Domestic nonfinancial companies had $9.95 trillion in debt outstanding in the second quarter, an increase of $1.2 trillion from just two years ago. 

At 47% of gross domestic product, the level of corporate debt in relation to the economy has never been so high.

That certainly sounds ominous, but is it? 

While some economists, including Federal Reserve Bank of Boston President Eric Rosengren, have expressed concern about the high level of corporate debt, the general feeling had been that it didn’t represent as great a risk as it appeared at first blush. 

This is because the debt level of American companies in relation to corporate profits didn’t appear all that high compared with where it was before the past few recessions. On that basis, it seemed as if companies weren’t in danger of struggling to pay off what they owed.

But in late July, the Commerce Department revised the profit figures economists were using to make their debt-to-income tabulations. 

After incorporating new and revised corporate tax-return data from the Internal Revenue Service, domestic nonfinancial companies’ net operating surplus—an income measure comparable to earnings before interest, taxes, depreciation and amortization, or Ebitda—was about a tenth lower in the first quarter than previously reported.


Boston Fed President Eric Rosengren has expressed concern about corporate-debt loads. Photo: Keith Bedford/Reuters


As a result, corporate debt-to-income levels look significantly more elevated than they were before the revisions. 

Adjusting for earnings cyclicality and companies’ cash holdings, JPMorgan Chase economist Jesse Edgerton calculates that nonfinancial corporate debt came to 2.24 times Ebitda in the second quarter. That is a bit above the level reached in advance of the last recession, and approaching the levels reached before the previous two downturns.

This doesn’t mean that a recession is in the offing, and investors can take some solace in the fact that paying off debt isn’t so onerous as it once was. Investment-grade corporate-bond yields are at their lowest levels since the 1950s, and many companies have taken advantage of the low-rate environment by refinancing their debt. Mr. Edgerton calculates that interest-coverage ratios are broadly in keeping with where they have been for the past 25 years.

Still, high corporate-debt levels represent a vulnerability. If demand shows signs of faltering, companies could be quicker to ratchet down spending and hiring than they would be if they weren’t so indebted, putting the economy at risk. 

If a recession hits, as eventually one will, riding out the downturn could become a whole lot harder.

martes, octubre 08, 2019

ISRAELI GRIDLOCK / GEOPOLITICAL FUTURES

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Israeli Gridlock

Whether Israel is dragged into a third election this year will depend on whether Netanyahu abdicates power or is forced to step down as leader of the Likud party.

By Jacob L. Shapiro




Parliamentary elections held Tuesday in Israel produced a remarkable and unfamiliar result: everyone, including Benjamin Netanyahu, the longest-serving prime minister in the country’s history, lost. Neither his religious-conservative bloc nor the slightly-to-the-left party led by his primary challenger, former military chief Benny Gantz, secured enough support to form a majority. Avigdor Liberman, the head of the Yisrael Beiteinu party, a one-time Netanyahu ally and current kingmaker, could deliver a majority to the incumbent if he wanted to but appears hellbent on keeping him and his religious partners out of power.
Netanyahu has offered to negotiate with Gantz and Liberman over a potential unity government, which would feature a joint premiership like the one Shimon Peres and Yitzhak Shamir had after the 1984 election, but Gantz isn’t interested, committing again to forming a “broad and liberal unity government” on Thursday. His second in command, former prime ministerial hopeful Yair Lapid, told reporters that Gantz will form such a government as soon as Netanyahu steps aside. In short, whether or not Israel is dragged into a third election this year will depend on the unlikely event that Netanyahu abdicates power or is forced to step down as leader of the Likud party.



It’s hard to see a way out of the gridlock. Netanyahu has already signed an agreement with the religious parties Shas and United Torah Judaism and the far-right Yamina party to negotiate as a single bloc. Liberman is famously secular and has vowed to not be part of a government that also included them as members. Liberman, however, is also famously hawkish, especially toward Arab Israelis. He’s already said he will refuse to participate in any government where Arabs have a seat at the table, which all but guarantees that Gantz won’t be able to form a government either.
The results exemplify two powerful domestic forces dividing the Israeli electorate along religious and ethnic grounds. The religious-secular divide is growing in lockstep with a demographic rise in the percentage of religious Israelis, whose support kept Netanyahu in power for so many years, albeit by a razor’s edge. However, corruption allegations and indictments hanging over Netanyahu’s head, as well as higher voter turnout among Netanyahu-opposed segments of the electorate, have eaten into his majority coalition.
The Arab-Jewish divide is also becoming more pronounced. Three Arab parties, which represent the 20 percent or so of Arab Israelis, ran as a “Joint List” in this latest round of elections, earning 13 total seats in the Knesset (up from 10 in the previous election). This may not be that large of a number, but in such a fractured political environment, three seats can be the difference between a majority coalition and a new election. It’s unclear (but highly unlikely) that Gantz would form a government with them (or that they would participate in a government with him); no Israeli government has included them, and a new one with Liberman in tow certainly won’t either. Effectively ignoring 20 percent of the population will only make the gridlock more severe, much as it has for the past few years. On the other hand, if Gantz can assemble a unity government with Likud, and if Israeli Arab political unity holds, an Arab party could be the leader of the opposition for the first time in Israel’s history. That’s a lot of ifs, but even the remote chance of it happening underscores increased Arab political power in Israel.
Either way, at a foreign policy level, little is likely to change. If Netanyahu remains in office, literally nothing will change. If Gantz replaces him, he may prove to be different in style if not substance. In the weeks leading up to the election, Netanyahu made headlines by promising to annex “Area C,” the part of the West Bank that includes the Jordan Valley. Yet in July Gantz said the Jordan Valley “will always remain under [Israeli] control.” Some have compared Gantz to Israeli political legend Yitzhak Rabin, who also made the jump from military chief to prime minister. Joint List’s Ayman Odeh ran afoul of some of his own constituents for even considering recommending Gantz for the post, something no Arab party has done since Rabin.
Gantz may have some “Rabin” in him, in that he is a former military man coming to politics, but he is hardly the ideological heir to Rabin’s policies. The Labor Party, which Rabin led, earned just 6 Knesset seats in the election. And if he became prime minister, he would be coming into a completely different political environment, one far less conducive for Palestinian peace talks. He will have bigger security issues on his plate, namely, to keep Gaza calm, to combat Hezbollah’s growing strength in Lebanon, to limit Iranian support of Iraq and Syria, and to find balance between Turkey and Iran in general. (It may not matter in any case, since his path to premiership runs through Yisrael Beiteinu and Likud, neither of which will compromise on Palestine.)
Netanyahu’s opponents are relishing in his perceived defeat, but that’s more schadenfreude than policy coup. Gantz and Netanyahu are both generally center right, and either one will have to govern with unstable coalitions liable to crumble at the first sign of trouble. What is most significant about these election results it that they confirm what the previous election results already showed: Israeli society is divided between the religious and secular on the one hand and between Arabs and Jews on the other. The demographics of those divides are such that old political arrangements have become obsolete and that new alignments require new compromises that, at least so far, are too unpalatable to the various factions and parties to make.