Tag Archives: debt

I Get My Comments Published in the NYT, Expect Hate Mail

The problem with economics and other soft sciences is that a series of unsubstantiated pronouncements constitute an argument. We have no reason to trust any of these explanations, much less the standard liberal bromide that we need to tax money away from savers and give to spendthrifts. All of these theories are propounded by Keynesians who got the Japanese and Europeans into the pickle in the first place. My problem is that we in the USA have exactly the same trajectory and Keynesians in charge as did the Japanese and Europeans. The throwing money at the dartboard to pick a solution has failed and no one has any better ideas.
Economics, as a “science” does not have the power that would justify allowing the Fed and Congress, or any other central power to engineer the economy. Capitalistic societies have booms and busts, deflations and inflations, localized collapses and even disappearances of productive life. Visit any ghost town or recall the 1840, 1870-90, 1930 deflations, the panics, most short lived and self correcting in the history of the USA.
There may not be anything wrong with deflation. Little people who save can gain by putting money under their mattresses and won’t lose it to inflation. Investors will need to be much more careful to be sure that their projects make sense, our government will struggle and be hampered in its attempts to “help” people.
Finally, under socialism, planned economies, welfare states and the like there are no booms, only chronic busts.

Ramming Kentwood into More Debt, Raising Taxes by the Back Door

We got the Parks and Recreation Commissioners’ minutes for the last 3 months in the latest city commission packet. We’ve been missing a lot more than just delayed reports.

The commissioners are Emily Bridson, Bob Coughlin, Brian Dickey, Mimi Madden, Dustin Moseley, Kevin Small and Chair Bob Jones. Mr. Terry Schweitzer of planning is usually present at their meetings. Mark Rambo, Deputy City Administrator was there in March, the laying on of hands by our City Hall so to speak.

It seems that there are actual plans to replace the Kent Activities Center (KAC) on 48th and to spend more money on other recreation opportunities for “new families” and “new businesses” that will be moving to Kentwood. (And the whole time I thought that we were merely serving the same old long suffering taxpayers and shopworn residents, shame on me.)

The Parks and Rec Commission has been using Federal Community Block Grants, DNR, and some of the money left over from a now expired parks millage to fund new acquisitions and upgrades, and doing just fine. The operational money comes from the city’s general fund and I’m told that we will be in surplus as we pay down our bonds.

The Parks and Recreation Commission envisions expansion of facilities although the amount land in Kentwood hasn’t changed in 5 decades and the city is thought to be 90% “built out.” It’s hard to justify expansion if the supply of park services has been adequate for 50 years; do they think that our aging population want more grassland on which to play soccer or to jog?

There is a saving grace of caution in these minutes that comes from City Hall. I have been asking for data documenting how much our parks and rec facilities are actually used since I was elected in 2013. Are they near capacity, or are they, as my personal observations seem to show, almost abandoned? The Paul Henry Bike Trail that my wife and I did on the Fourth of July was busy enough but not long enough for serious biking. (We were really put off by the traffic along 60th Street and it’s hard to see where this path could be expanded to make it more natural.) We saw a half dozen small parks along the way, all empty on the biggest summer holiday of the year.

Mark Rambo in addressing the Commissioners’ request for guidance in borrowing the money for their new projects, suggests being sure that there is a need for more recreational facility and providing documentation.  If we need to renew the Parks Millage we should know how much is needed, and for what.  The Commission needs to identify activities that are missing in the Kentwood area that the public can’t get when it flocks to Planet Fitness and MVP voting with their own money.

Our Parks and Rec department read the statistically flawed, push-poll-generated parks study from 2 or 3 years ago and apparently wants to rush us past the gritty Kentwood realities to get to some sort of promised land that might be valid in California or in the minds of academic dreamers who state that a community needs a swimming pool for every 20,000 residents. (Where do these numbers come from?)

Just as our police use crime data to focus their resources , the Parks and Rec commission need to show usage, picnic tables occupied by families on holidays, kids playing sandlot baseball on weekday afternoons and young couples watching birds and flowers in nature preserves ere we pile yet more debt and the taxes on our indebted populace to pay for this stuff.

Our Commissioners Attend the Annual Strategizing Conference. I Emerge Not Terribly Depressed

We “city fathers” and heads of department spent an otherwise sunny Saturday at a well planned and executed meeting in which an imported facilitator led us along the usual pro-forma, management-approved ruts that these affairs always follow. I will relate a few of the bland recommendations. We needed to foster the Kentwood brand, speak well of the city government,  continue to foster the feeling of safety and orderliness that our residents may (or may not) treasure, keep costs and taxes low, and guard against threats coming from the economy, from civil unrest, or from other governments that could derail our plans. By way of boosting Kentwood, the meeting was held in downtown Grand Rapids.

There were no ringing calls for spending money to reach the Promised Land or for imposing new onerous regulations on the citizenry. I participated actively and at the end, had no idea about what future we had designed. The upside is that not having a concrete plan about where we should be going will allow the future to come as a complete surprise rather than as an continuously visible failing goal pinned on every cubicle wall, viewed daily with dread and anxiety.

I am of course not without some personal ideas about what we in the commission should do to manage our future. I start from a perspective of an outsider gazing down from a longer distance, darkly. Kentwood, it seems to me, has numerous threats, both internal and external, any one of which could thwart any well thought out plans.

Some are internal problems that we can address. We have debts and a defined pension plan about half invested in stocks.  Inflation, reaching only 0.7% in the USA last year, has been on a steady decline for 35  years. The inflation rate in much of the industrialized world is less than zero. If deflation takes hold, our equity markets would undoubtedly collapse, shriveling our defined pension plan and plunging the city into deep financial crisis. We should invest the defined pension plan money in long term treasury bonds or offloaded our risk by buying annuity policies for covered employees. We should also pay off our bonds when they are due rather than refinancing them at “low” interest rates. If deflation reaches 5% per annum, our real interest rates will look more like 8% at a time when real estate, income and sales taxes are all falling  making governmental revenues scarce. Deflation threatens the general US and world-wide economy but handled properly, it could make Kentwood with its relatively low debts the shining diamond of our region.

We can’t do much about the rest of the threats that we face.

We in Kentwood are tied in with the economies of Grand Rapids, Michigan, Detroit and Chicago/Illinois with their huge debts; defaults will cramp our finances and economy.

The average Kentwood  income has diminished from 49k to 39k in the last 10 years. I’d argue that the diminution is not because our citizens are working less, but rather because economically less productive residents are moving in.

Our real estate market has not recovered back to its admittedly bloated 2007 level.

Michigan’s DEQ (of Flint water fame) wants all new developments to retain all storm water on the property, but we have impenetrable clay soil and so may not be able to develop empty areas of our city.

The Feds have fantasies about distributing poverty to all neighborhoods in an apparent pursuit of equality, thereby improving our collective protoplasm, or something.

Our diversity, seen unaccountably as a virtue, could turn on itself turning ugly and cause devastating costs and hatreds.

Large portions of our city are were built in the 1920s and are on the cusp of economic obsolescence.

So I would plan working only for our survival. We should bend our energies to forestalling crippling losses and parrying threats that could destroy the vaunted peace and perception of orderliness in Kentwood.

I’m glad that the conference didn’t advance any new adventures in which we would fritter away our money. Opportunities in our city will come irregularly and from eruptions in the private sphere or in nature that no official can anticipate. (Who would have foreseen North Dakotans as being transiently wealthy due to fracking or more recently becoming a center for drone research; they had merely to let prosperity happen.) Hopefully, if and when opportunities come knocking, our city will still be functioning and able to benefit. Our leaders should curb their impulses to snuff out spontaneous and often disruptive innovations with regulations and planning, or, heavens forbid, subsidies.

Making Money on the Stock Market, by not Losing it. The Kentwood City Commission as a Leading Indicator

There are well known indicators of overconfidence in equity markets like high margin borrowing, shrinking short sales and record numbers of mergers and acquisitions. Bernard Baruch, the successful investor is reported to have said, “When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.”

And so your underrated blogger listened in silence as his fellow commissioners went on and on at the inaugural meeting in early November about how well the city was managed, how solvent it was, and how superior our city’s finances were compared to others.  We have a 30 plus million dollar pension fund, half invested in stocks.

The reminder was timely; I owned only one stock and I’ve held for so long that I’d nearly forgotten about. I sold it the next day and made a modest profit.

 

We all have Credit now, and that’s Less than Nothing. Why I worry about Deflation and our Kentwood Debt

“Die Moor Soldaten” was a song written during the 1930s by International Socialists imprisoned by German National Nocialists.These political prisoners were worked to death, forced to dig ditches all day and fill them back in at night. The poor wretches would have understood the difference between credit (debt), and money(cash).

Debt, or borrowing, is a negative, a ditch from which one must make a greater back breaking effort to move dirt up and out as the hole becomes deeper and the nearby mountain of dirt becomes higher each day.

Money is a positive, the bulge that a hill of dirt makes above the field from which it’s easy, in the short term at least, to move dirt downhill back into the hole. Too bad that modern economists, who don’t understand the difference, wallow nostalgically in the Keynesian and Hayekian landscape of “money” of “printing money” and of “managing money” as though it were an important commodity in modern economies. It’s not. We use plastic at stores and borrow to buy houses; no one pays with 100 dollar bills.

Money, be it old money, gold, rapidly depreciating Venezuelan Bolivars, a balance in a checking account or savings at a bank is wealth. It is better than nothing. One can dispose of the stuff easily, spend it like a drunken sailor, just like our “Moor Soldaten” found it easier to push the loose soil back into the hole. It flows effortlessly through our hands like dirt followed gravity in those north German moors.
Government historically diluted the gold and silver in their coins or issued fiat currencies and so could cause money inflation, effecting citizens’ economic behaviors in the short term. Keynesianism worked (maybe) before modern economies evolved to borrowing to sustain itself.
Credit, be it on a card, bank loan, mortgage, or an obligation to pay a defined benefit pension is less than nothing; it’s a negative, a hole in the ground from which one it takes increasing effort to dig deeper to move the dirt out of the hole and onto the hill. As debt became better understood by average people during the recent financial unpleasantness, it acquired a reputation as a burden and fewer took on. I’m old and established, one of the few who still carry a credit card; it’s paid off monthly. Young people at the check out counter in stores no longer carry credit cards; they use debit cards (cash in the bank) because they’ve learned to fear digging a hole of debt for themselves. Home ownership in the USA is shrinking.
The Fed no longer prints money but rather asserts that it creates credit, assuming that consumers, businesses and lenders would continue to use the “easy money.” But credit creates money only if it borrowed into existence. Borrowing is no longer fashionable. The Fed’s Keynesian policy pretends that the hole created by citizens taking on more debt wasn’t getting deeper and that lifting the dirt out of the hole wasn’t growing beyond normal human capacity. Trying to stimulate spending by making credit readily available depends on convincing the wretches in the hole that they are on level ground easily pushing dirt around. But those prisoners have been squeezed by the financial unpleasantness of the last few years and see that the field is not level, that moving dirt uphill is harder the more of it that there is. So, personal debt in many advanced countries shrinks as folks pay off their credit cards and rent instead of taking on mortgages. Consumer spending is stable or shrinking, confounding the Nobel prize winning economists who fantasize creating cheap credit to “stimulate” the economy into high drive (and also Ron Paul who has predicted the inflationary blowout for 40 years now.)
The Japanese “stimulated” the economy with low interest rates and high spending in 1990 and have been in deflation have been in deflation for 25 years. Most European countries, following the same formula after the 2008 panic, have negative cost of living indices.

Our Fed in the USA is still trying to get us Americans to shovel the same old dirt denominated in cash and money. It’s not working. It pretends to “stimulate” the economy with cheap credit and worries publicly about deflation as our consumer price inflater hovers around 1.6%. The Fed plays in its own sandbox with an outmoded financial model, stubbornly ignoring today’s economy.
Credit is not money. The US economy is not outside of history

Debt, great for businesses, poison for governments.

A lot of politicians tout business experience; I certainly do.

I like using business techniques to get into numbers, look at cash inflows and outflows, do projections, gauge trade offs between short and long term costs, estimate interest rates and risks, judge the stability of some revenue source and the like. But Kentwood is not a business.

A businessman borrows at let’s say 5% (market rates, the perceived risk) and invests in inventory, equipment, speculation or whatever, hoping that his return will be 10%, so allowing him to retire the debt and to continue borrowing and making money.

Kentwood and the city commission are not in the money making business; we have only to run a city on behalf of citizens who trust us to maintain the streets, maintain public safety with police and fire, provide for some recreational opportunities and allow them to seek their own happiness in a peaceful manner. We have no mandate to make life better, to provide jobs, business opportunities or to entertain and inspire the taxpayers in Kentwood.

Taxpayers (renters pay for city services indirectly) should however pay for the streets and public services that they need for a civilized life.

If a townhall, library, firehouse and Hall of Justice are necessary, then these should be provided at the least cost for the involuntary users. They should not erected for the edification of politicians who put their names on the brass plaques. The city should provide only those facilities that function efficiently for the city employees and that can easily be accommodated for future needs.

Kentwood had no debts and some decrepit governmental buildings until 12 years ago when the flash inspiration to rebuild swept away thrift. We built 4 contemporary buildings on an otherwise empty patch with a few apartments, an abandoned church and a toxic waste dump on the horizon. Total cost, over 20 million. There were no businesses or other reason for most of us in Kentwood to go near the place. About tastes there must be no dispute, but I’m unimpressed. None of my neigbors knows where the city complex is, so I can’t get their opinion about fluff like inspiration and public involvement.

A very long pole barn would have been much cheaper, could be easily accommodated to the shifting needs of government and would fit in with the numerous assembly, manufacturing and distributors’ buildings around the airport. Why would the city government want to look better than its best taxpayers?

The point is that we borrowed and now have to pay for something that few of those who pay would buy. There is no market demand, no hope for profit or great outpouring of public enthusiasm for the governmental complex. No business or homeowner has ever moved to Kentwood because of love of great rococo architecture or for the view.

Borrowing capacity is necessary for governments to fund unexpected emergencies and the function must be retained and carefully nurtured. Our citizens should pay for what they need and nothing more. I doubt that many would fritter away the margin of safety in being able to borrow when the crunch is severe for having trendy buildings and the millstone of debt.

Debt, the leak in the dyke that demands plugging now and the “man the bilge pumps,” else all is lost.

Paul Krugman the Nobel Laureate in economics writes in Monday’s NY Times that debt is good, that attempts to pay it off are bad, and that nations and individuals should take on more because it will help “the economy.”  Elsewhere, he claims that borrowing is OK as long as we can pay the interest. “We owe it to ourselves.”

What?

Krugman has apparently never personally experienced the downside of loans (fixed income securities, or “paper” as it’s known in the trade.) Many of us in Kentwood know the stress of having to make a car or a mortgage payment when times get tough. The feeling of being trapped, of having to mooch off of friends or relatives, of scrambling to make a few more dollars to keep what you have; if you fall behind, the bank or owner of the paper will stuff back and ruin your credit. Paul Hense, a former CPA who had offices in Kentwood often pointed out that wealth is not an excuse to not work, but rather allows people to make better decisions. On the other side, the threat of loss from not paying one’s debts causes panic, the irrational and desperate thinking that gets nothing done.

What Krugman misses are the basic features of paper, that the principle will have to be repaid, that debt interferes with one’s ability to borrow more, that buying stuff on credit when times are good is easy and pleasurable and repayment unnoticed, but that economic times can get tough making servicing those debts becomes a hell.

What I hear around city hall is that the economic slowdown of 2008-11 caused real pain with layoffs and projects defered. Another theme is that we should be saving up for small purchases like fire trucks and computer equipment, but that borrowing for the big stuff should be standard and is even better with our current low interest rates. Of course, we are refinancing all of our previous bond issues to save a few hundred thousand here and there, to great self praise.

The city has a AA credit rating, good for a Michigan city but we had to pay Fitch and S & P to be rated before we could borrow. Our total long term debt as of 2014 is nearly 22.9 million, 19.4 million of which are in bonds issued since 2002 to pay for the 4 modern buildings from the city complex (I’ll bet that most folks in Kentwood have never seen them.) We paid off 1.9 million last year and borrowed a new 2.9 million from a “Drinking Water Revolving Fund.”

Besides debt, Kentwood finances are at risk from now abandoned defined benefit pension plan. We must provide a fixed amount of money for these retirees. This is funded in part by gains in the stock market from which we assume an annual return of 6.5%, conservative among Michigan cities, but higher than the 5% suggested by the Economist Magazine. If there is deflation or some other major disruption in the US economy, Kentwood could be at risk for spending millions to make up for the pension shortfall.

Right now, times are good. The national and Michigan economies are stable and no one frets about debts. I’m a gloomy sort and fret a lot about hard times; they will come and we have made many sacrifices already. We’ll have to find more. I don’t detect any enthusiasm to raise taxes.

Our interest payments were 588K last year plus the 1.9 amortization show that abpout 2.5 million must be paid, or else. Two and a half million  in a 33 million per year operation seems manageable until the income stream is compromised because housing prices (and tax income) are in the toilet or the unemployment rate is over 10%; then the panic sets in, and crazy stuff can happen.

It might be prudent to study ways to cut costs now when everything is calm. Certainly it’s not wise to increase our expenditures; rather we should be putting a bit aside to buffer a huge downside move in revenues. In Kentwood, there is still room to expand, so new residents and businesses ought be welcomed to increase our tax base.

Krugman sees the benefits of borrowing from the banker’s and economist’s vantage; he ignores the other half of the balance sheet. We in Kentwood and in our household budgets have to deal with making repayments. These demands for cash continue even in hard times when our attention should be directed at solving cost cutting problems. Fear and having to resort to panicky “plugging in the dyke” solutions which solve little is the high and poorly understood cost of living in a pawnshop economy.