Category Archives: interest rates

“Lord, What Fools These Mortals Be!” When Discussing Fed Actions And The US Economy

Many investors spend hours each week watching programs on CNBC that endlessly discuss the state of the US economy and the actions of the Fed. Most of what they say is repetitive foolish banter “signifying nothing”. They talk incessantly about actions the Fed has taken and should take, every tweet of President Trump criticizing the Fed, developments in the trade war with China, negative interest rates in Europe and Japan and recently, the inverted yield curve in the US. They then discuss and ask their guests for an opinion as to what action the Fed should take and whether stocks will go up or down or a recession is coming. Except for the opinion of an occasional guest or reference to a tweet of President Trump which they often mock as inappropriate they make almost no reference to the egregious errors of the Fed which inappropriately raised interest rates and reduced its balance sheet during 2018 and had foolishly projected further interest rate increases and balance sheet reductions in 2019. Such actions by the Fed slowed the forward momentum of the economy resulting from the once in a generation Trump tax cuts and his regulatory changes. Rather than praising President Trump for exposing the Feds errors they foolishly criticize him for interfering with the independence of the Fed and speculate on whether he is seeking political cover for the adverse effects of his trade war with China.

The Fed regulates both government interest rates and banks. Its Congressional mandates are to maximize employment, promote stable prices and moderate long term interest rates. They have become known as the dual mandates because it is assumed that if the first two mandates are met, interest rates will remain moderate. The mandates seem simple, but they are not. The Fed claims it is data dependent when taking actions. It gathers and reviews a broad range of data before making a decision to raise or lower interest rates or to increase or decrease the size of its balance sheet by purchasing or selling bonds. Then it acts in a way to best fulfill its mandate. To act wisely the Fed has to fully understand the data and anticipate future changes in the data including changes that may result from its own actions. Should it be looking at short term or long term unemployment or both? Should it assume that if the rate of expansion of the economy grows, that inflation will inevitably follow? Should it anticipate the risk of recession or stagflation?

During the Great Recession the Fed concluded that its mandates required greatly reduced interest rates and repeated doses of QE to an extent never before tried. Its actions worked spectacularly. But when the economy turned upward it lost its way. Rather than being patient (a word it later discovered) and observing the growth of the economy and its effects on inflation, it mindlessly decided to raise interest rates and rapidly reduce its balance sheet. It failed to recognize that if it could get the US economy out of the Great Recession without going through a depression, it could honor its Congressional mandate by taking actions to promote economic growth and avoid future recessions. It ignored most of the available data. It should have considered the size and rate of change of the National Debt and the GDP. It should have observed the status of and the potential effect on the GDP of the trade negotiations with China, interest rates in other countries, the affect of falling stock prices on consumer confidence and spending, the Amazon effect on the stability of the CPI, government spending, tax revenues and other data that affects the US economy. The Fed has indicated that it considers a rate of inflation of approximately 2% as being consistent with stable prices, but that it will permit rates in excess of 2%. It has recently indicated a major policy change by taking actions to extend the current expansion and avoid a recession instead of letting the expansion run its course and dealing with a recession when it occurs. Yet it has virtually ignored the aggregate interest which will be paid in future years on the swollen National Debt and the impact that its own actions in raising interest rates will have on the interest payments on the National Debt. It also ignored the effect such interest payments will have on future infrastructure spending and on the economy and employment. It acted incompetently by raising interest rates in December 2018  and announcing further expected rate increases and balance sheet sales while the major stock market averages were collapsing. Except for a limited and mostly muted criticism, comments on CNBC have ignored the errors of the Fed.

The Fed does not act in a vacuum. Its actions interact with the actions taken by Congress and the the Executive Branch. It should not be free of criticism. Its independence results from the fact that its actions do not require the prior approval of either Congress or the President. Some people argue that the President should not comment on the actions of the Fed because that interferes with its independence. That is nonsense. What the Fed does affects what the President is elected to accomplish. If it makes mistakes he should let them and the public know it. His criticism is even more important if the leftist press fails to do so. The Feds actions have a profound affect on business and investment decisions and must be considered an important part of the data it is reviewing. The Fed should be in constant contact with the Executive branch and Congress to best gage future changes in fiscal policy.

Although few people realize it, the Fed has done a terrible job of raising and lowering interest rates and justifying its actions during the last couple of years. Interest rates are currently too high and the Fed has reduced its balance sheet much too quickly. The Fed claims it is data dependent, but it pays scant attention to some of the most important available data. It focuses on a limited number of data points and is only beginning to realize that It virtually ignored much of the important data including stock market declines, the China trade negotiations and the spread between US and foreign interest rates. It seems to have totally ignored the affect that raising interest rates will have on future Federal spending if the US debt is rolled over at higher interest rates. It also ignored the adverse affect on the Federal deficit from the slowdown in GDP growth resulting from rising interest rates and the reduction of the Fed balance sheet. As noted above  in December 2018, the Fed committed a major blunder by raising interest rates and predicting three more raises in 2019 while the securities markets were collapsing. It should have looked at the data from the 1920’s when a collapsing stock market caused in large part by margin loan liquidations led to the Great Depression.  It raised interest rates when it should have lowered them. How foolish the mortals at the Fed were. Fortunately the Fed found a reason (called a “mid cycle adjustment” by Chairman Powell”) to reverse the December interest rate increase in July 2019 and stopped reducing its balance sheet, but it never admitted its December errors. It seems to strive for a 2% rate of growth in the GDP when it should not find anything less than 4% acceptable while striving for 5% or 6%. We certainly would have less fear of a coming recession if the economy was growing at a 3% rate or higher. Yet, we hear fool after fool arguing that there was no need for a rate cut. The emerging Democrat socialist left is even more dangerous. It proposes taking from the rich and the upper middle class to further enhance the already substantial welfare benefits for the lower income workers and the unemployed. It ignores the historical record of Socialism. It never works. Despite the failures of local governments, the collapse of the family and an educational system gravely in need of improvement, the rising tide in our economy produced by free market capitalism has lifted the economic well being of almost all Americans. It has offered unprecedented educational and business opportunities for poor children who take advantage of them through their individual efforts. But, we can and must grow or economy at a higher rate.

The Fed is also responsible for regulating the banking industry, a major role because loan defaults often cause a recession. Both Shakespeare and Benjamin Franklin knew about the economies of their day and the risks of debt. Shakespeare wrote “Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” In those days you went to jail for debt default. Franklin said similarly “He that goes a borrowing goes a sorrowing.” Although neither of them foresaw the great benefits of debt, they warned of its risk because they worried about the affects of default. Today, Fed officials and most economists recognize both the benefits of debt  and the detriments of default on our economic prosperity. The Fed attempts to regulate bank leverage, to insure solvency against loan defaults, but does not prevent banks from making improvident amounts of high risk loans. It did not learn from the defaults that followed excessive mortgage lending on overvalued homes. Excessive margin lending to investors and loans to wildcat oil and gas drillers pose a danger to the stability of banks. The Fed should be taking action to reduce the risks associated therewith, but it is not paying adequate attention to the risks of default highlighted by Shakespeare and Franklin. The Fed should be limiting margin borrowing by reducing the 50% initial margin requirement in rising markets to protect against defaults in falling markets. It should be limiting loans by banks to high risk borrowers who use the loan proceeds in highly speculative endeavors.

We rightfully worry about climate change and the environment . The new socialist left seeks to combat it by mindlessly banning vital energy and food sources that are fundamental to the betterment of mankind. There are better ways. We are reducing detrimental emissions over time. Suppose we used our great industrial complex to build an interstate fresh water pipeline. It would enhance our water supply, let us fill our lakes and aquifers, and help us deal with the wind induced fires and the rise in ocean levels. It could be part of a national program to accelerate economic growth, improve our failing infrastructure,  create new employment opportunities, avoid recessions and reduce reliance on Fed actions.

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Has Chairman Powell Learned From His Terrible Mistakes?

For years the talking heads and their guests on cable news endlessly chattered about interest rates remaining near zero in the US and negative in Europe. They talked of the “new normal”. However, some complained that interest rates had remained too low for too long and of the importance of raising interest rates and reducing the Fed balance sheet so that the Fed would have powder to fight a downturn in the economy. Upon his becoming Fed chairman, Jerome Powell quickly demonstrated that he believed in the latter approach.  We were in un-chartered territory. Never before had interest rates been so low for as long  or had QE been used to such an extent. There was talk about a neutral rate of interest. They hadn’t learned that just as every reduction in interest rates or expansion of the Fed balance sheet had spurred the economy, every raise in interest rates or reduction in the balance sheet negatively impacts the economy.  The interest rate and size of the Fed balance sheet you are at at any given time can be considered neutral because any increase in the rate of interest or sale of Fed assets slows the economy and any decrease in the rate or purchase of assets stimulates the economy.

Although the economy was growing and there was no sign of inflation when he was appointed, Chairman Powell chose not to wait patiently. He began his chairmanship by raising interest rates and reducing the Fed’s bond portfolio much too quickly. He did so at a time when the growing economy and rising corporate profits were beginning to generate additional federal tax revenues which would have reduced the federal deficit. As predictable his actions negatively impacted the economy and the stock market which went into a steep decline. His final 1/4 point raise of interest rates in December of 2018 while the stock market was collapsing was not just stupid, it was idiotic. To make matters worse he recklessly announced plans for further rate increases and balance sheet reductions in 2019. His actions were instrumental in killing the momentum that the corporate tax cuts (a once in a generation stimulus) had generated in the US economy and raised a serious likelihood of causing a downturn in the US economy. Corporations that were already spooked by President Trump’s attempt to level the playing field in trade by imposing tariffs, immediately began to reconsider and postpone capital investments.

After being strongly criticized by President Trump and many others he quickly reversed course, He announced that further rate increases would be delayed and introduced the concept of “patience”. This word selection demonstrated that he either still didn’t fully understand his prior mistakes or that he wouldn’t acknowledge them because he wanted to show he was independent and wouldn’t bow to President Trump’s wishes. What he obviously meant by “patience” was that he would delay further increases. He didn’t recognize that rates were already too high and that the December increase should have been reversed. However, cancelling intended further rate increases did stimulate the stock market and permitted economic expansion to continue. Recently when corporate earnings came under pressure and the stock market went into a tailspin again based in large part on trade and border issues and a lack of infrastructure spending, he took notice of the market decline and the possibility of a coming recession by talking about potential interest rate cuts this year. Although he slowed Fed asset asset sales he did not discontinue them to the chagrin of President Trump.

Chairman Powell appears to be learning on the job. I ask if he has learned too little, too late. At the June meeting of the Fed he recognized that the Fed can take preventive steps to extend economic growth and avoid a recession rather than waiting to reverse one. He also recognized that governmental actions relating to trade and  Congressional failures to act should be taken into consideration by the Fed. But, he should have acknowledged his prior errors and reduced interest rates. Although we can expect a rate decrease in July, I fear he still does not appreciate the desirability of low interest rates for an indeterminate period or of growing the economy at a rate in excess of 2% a year and will be more concerned with appearing to be independent. Instead of worrying about his independence, he should be coordinating with administration officials to be better able to coordinate Fed policies with fiscal policy. The Fed’s independence is assured by statute. Its actions do not need approval of the President or Congress. Its role in ending the Great Recession was important to our prosperity. However, when it makes serious mistakes it should welcome criticism from the President and others. Whether or not he can be replaced as Chairman by the President, when the Fed chairman makes repeated errors he should resign.

Since he has spent his time thinking about interest rates and the Fed balance sheet, it seems unlikely that he now recognizes or has even thought about the risk that market factors which might cause a stock market collapse present a similar risk to the US economy as existed in the 1930’s.  As I have written recently he could have worked with the SEC and taken steps to reduce stock market manipulation and volatility and the risk of a stock market collapse which might follow or lead to a serious recession or even a depression. The overheating of IPO offerings in recent weeks has been fueled by increased margin borrowing on both the long and short sides of transactions.

He has recently talked of living with inflation even if exceeds the 2% guideline of the Fed. However I expect that he would probably panic and choke off the economy if it accelerated again (as it could if we spent trillions of dollars on needed infrastructure for highways, bridges, airports or security, or if we spent to limit the effects of climate change by upgrading levees and dams to control flooding or built an interstate fresh water pipeline (the most important project of this century) and began to grow our economy at 4, 5, or 6 %. I expect he would fear inflation even though the causes of inflation were absent. Robots are coming and they will make employees available for non-inflationary economic growth thereby enhancing the Amazon related deflationary effects on the economy. China builds new cities. Why can’t we upgrade ours instead of letting widespread crime turn them into slums? Of course we would have to deal with the limits of available raw materials and the socialist jerks who would argue that the rich are getting richer even if we were creating millions of high paying jobs for a large number of currently low income workers and generating tax revenues to enable us to pay for for the greatest welfare state the world has ever known.

The Fed’s role is important. Unless our economy grows at a satisfactory pace, the rising number of politicians chanting for socialism may in a short time lead to the end of the great American capitalism experiment.

The Fed Funds Rate Should Be Reduced To 1% Or Less For An Indefinite Period

We are foolishly paying hundreds of billions of dollars of interest on the National Debt. Many European nations pay negative interest rates. We should reduce our interest rates and save the interest costs. It will reduce inflationary pressure and the interest saving can be used to fund infrastructure spending.

 

PREVENTING STOCK MARKET CRASHES

After every stock market crash we search for the causes and change rules and regulations to prevent future recurrences. Politicians are not well suited for the task. It is unlikely that the current rules and regulations will prevent a future crash because they fail to prevent or adequately limit use of practices which exacerbate market declines such as short selling, stop loss orders, chart theory and excessive margin buying which leads to margin liquidations in declining markets. Managers of many large pools of capital understand the effects of such practices and execute trades timed to further enhance extreme market declines so that they can then become buyers after the precipitous decline.

The talking heads on financial news networks have speculated lately on whether a 20% stock market decline like the one that occurred on October 19,1989 might occur again. They discuss the fact that a 600 point decline in the Dow is currently only about a 2% decline and that a 20% decline would amount to more than 5000 points in the Dow. They often talk about the differences in the US economy between 1989 and now, the possibility of a recession, the strength of corporate earnings and balance sheets, the trade war with China, tariffs, the effects of negative European interest rates, the rate of inflation and the Feds current stance on interest rates and its balance sheet. However, I haven’t heard them talk recently of governmental regulations or controls in place to prevent the recurrence of a 1989 type decline. The safety net value of current regulations and controls in place were about to be tested last year until the Fed reversed its course on interest rates after raising interest rates too fast and projecting ridiculously stupid further interest rate increases and balance sheet reductions. Has the Fed already forgotten the result of its successful policies which enabled our economy to escape from the Great Recession. Does the Fed understand that excessive stock market declines can lead not only to a recession, but as in the 1930’s to a depression? Fed chief Powell stupidly talks of patience when he should have admitted his error in adopting overly restrictive Fed policy decisions. 

Most of us learned from old western movies that a rancher who wishes to avoid a stampede of his horses or cattle builds secure fences or takes precautionary measures when moving his herd. Our current securities regulations and controls which are designed to stem an out of control decline were influenced by investment bankers seeking to maximize their profits by encouraging speculative practices in disregard of stock market stability. Brokers profit from charging high rates of margin interest and charging short sellers for borrowed stock. Speculators often profit in declining markets from short sales at declining prices made possible by the elimination of the uptick rule. A combination of factors acting in concert, including short selling at declining prices,  stop-loss order liquidations, margin calls, tax selling, reaching chart theory sell points and panic, cause stock price declines to be exaggerated.

Now is the time to take action to change the government regulations and controls of the securities markets to greatly reduce the probability of a crash. The Fed and the SEC should work together. Here is what I propose:

  1. The SEC should immediately reinstate the uptick rule and prevent way to avoid it. It was lunacy to remove it.
  2. The SEC should ban all new short selling when  any of the Dow, S&P or the NASDAQ averages (the “leading market averages”) have declined more that 20% from their 6 month highs; and continue the ban until all such averages have recovered at least 10% from their low point after the ban is put in place.
  3. The Fed should limit the risk of margin liquidations by changing margin requirements to provide that aggregate initial margin in an account shall be reduced to 40% during each 30 day period after which any of the leading market averages has hit a 12 month high.
  4. The SEC should change the way stop loss orders operate. Make them become good until canceled limit orders and not market orders when the stop loss point is reached. This will reduce the avalanche aspects of sales at declining market prices and discourage misplaced reliance on the protection of stop loss orders.
  5. Try to reduce dumping of large numbers of shares by active traders by charging a small fee on the dollar amount of all sales of securities held less than 5 years.

The Feds goal of full employment is negatively impacted by stock market declines. A reduction in the wealth of investors negatively impacts their spending. The Fed should stop talking foolishly about “patience” and clarify that it intends to reduce interest rates and engage in QE whenever stock prices decline significantly.

Eliminating Recessions, Minimizing Interest Payments On The National Debt And Maximizing Economic Growth Should Be Added To Fed Mandates

Brilliant action by the Fed, which kept interest rates low for more than 8 years, was instrumental in preventing the Great Recession from becoming a depression.  It was an exceptional achievement considering the mess our bankers has created. Low interest rates and QE debt purchases ended the downturn and worked together with technology improvements, the Amazon effect and other factors to fuel a low-inflation recovery. Eliminating many Obama administration regulations and the once in a generation business tax cut spearheaded by President Trump have greatly stimulated the GDP.  But a large number of fools including those currently leading the Fed seem bent on ending the upturn and causing a recession. Chairman Jerome Powell apparently learned nothing from the Fed’s efforts of recent years. Maybe it’s his banking background. Banks make higher profits in periods of rising interest rates. It is no surprise that most bankers think that rising interest rates are desirable, even necessary, in a growing economy to prevent excessive inflation.

Since wealth begets wealth perpetual economic growth in the range of 5 to 10% should be attainable. China has grown at that rate for many years. It’s clear that it will not happen under Chairman Powell if he follows the advice of incompetent economists who want three or four rate increases this year and at least two more next year accompanied by a faster reduction in the Fed’s balance sheet. Such actions will choke off the growth and are likely to cause short term interest rates to exceed long term rates. Economists debate whether an interest rate inversion will cause a recession. Why foolishly create the risk?

Interest is the cost of money. The higher the rate, the greater the cost of funding business operations,  including the cost of capital investments and carrying inventory and receivables. It will also over a few years have a devastating impact the cost of carrying our $20 trillion National Debt as the debt rolls over at higher rates. Rising interest rates will as usual CAUSE, not PREVENT, inflation by pushing up costs and lead our economy into the much-anticipated recession. Interest rates should at all times be kept at or below the desired rate of inflation. By doing so and controlling its balance sheet the Fed can (assuming sound fiscal policy and adequate regulation of banks and excessive risk) avoid future recessions.  Eliminating recessions, minimizing interest payments on the National Debt and maximizing economic growth should be added by Congress to the Fed mandates. Each is consistent with maintaining full employment. The Fed should be given the responsibility to react to events such as natural disasters or significant stock market declines or even a slowing of economic growth to keep the economy on a steady course.

The nonsensical talk about Fed independence is back in vogue. Of course the Fed should be independent to make its decisions. But, it does not act in a vacuum. It should invite criticism of its actions and be in constant contact with and coordinate its actions with Congress and Executive Branch.

 

 

Interest Rate Lunacy

The Obama administration missed an opportunity to extend the term of the US Debt. Each 1% increase in interest rates on the US Debt will soon cost our government $200 billion per year. Janet Yellen babbles on about unemployment, inflation and normalization of interest rates. She ignores the overriding need to keep interest rates as low as possible. The June increase in rates was a major mistake.

Immediate Repeal Of Obamacare Mandates And 10% Tax On Repatriation Of Overseas Funds

February 24, 2017

Dear President Trump;

Congratulations on your election victory. I am a Harvard Law School graduate with more than 50 years experience as a practicing securities, corporate, tax and estate planning attorney. I self-published two virtually unread books and a blog at sjfeconomics.com relating to homeland security and economic prosperity which I believe have important ideas that can be extremely helpful to your team. I delivered copies of my books to you with my letter of support in March 2016.

I have reviewed your first 100 day plan and strongly approve of most of it. For your program to be successful you must also win the political game for public approval of your actions that will be played against Democrats led most likely by President Obama and the liberal press. We know that they will rely on fake news, misleading statements and lies. Many of your proposals like your cabinet appointments will get delayed in Congress.

You are off to a good start. It is important that you do not lose the momentum. This letter will deal only with immediate steps to take relating to two of the items included in your 100 day plan that will impact job growth, namely, the manner in which Obamacare should be repealed and replaced and the change in the corporation tax laws by lowering the tax rate for repatriating capital held overseas to raise revenues to finance infrastructure construction.

1. THOUGHTS ABOUT THE REPEAL AND REPLACEMENT OF OBAMACARE

I am writing as a game player to suggest a strategy to win the approval of the minds of voters in the game of repealing and replacing Obamacare. I note that my factual knowledge about Obamacare comes primarily from TV and newspaper reports, discussions with friends and doctors and internet searches and must be fact checked. I know that millions of hours have been spent by people more qualified than me to expose the evils of and to guide Congress in developing a replacement plan for Obamacare.

OBAMACARE IS NOT FIXABLE. It is disguised as a health insurance program, but is primarily a welfare platform to provide tens of billions of dollars of healthcare benefits annually for people with pre-existing conditions that are disregarded in setting premiums. It is an intricately designed hodgepodge of laws that create uniform healthcare coverages entwined with Medicaid, Medicare, prescription drug and tax provisions (that further burden the middle class) included to make it appear attractive and to make it difficult to repeal. It was fraudulently promoted as a program that would cover everyone and reduce healthcare premiums. It is very unpopular and is failing primarily because of its excessive and often unaffordable premiums to employers who are the major purchasers of healthcare coverage and the outrageously high premiums and deductibles for healthy young people whose income level does not permit them to qualify for the subsidies. The high deductibles even make it worthless for many low-income people who qualify for premium subsidies. Ignoring pre-existing conditions is like offering fire insurance for your home after a fire has occurred or auto insurance after the accident. It is like telling homeowners that their fire insurance rates are being doubled or tripled so that uninsured owners whose homes have already burned down can buy a policy and collect hundreds of thousands of dollars to rebuild their homes. Trying to trick middle class young people and their employers to pay for such excessive benefits for others is outrageously unfair. The death spiral we are witnessing was inevitable. It has been accelerated because young healthy middle class people learned they were being targeted.

From its inception President Obama acting like a snake oil salesman has time and again lied about Obamacare to prevent successful young healthy people from learning that they were intentionally being grossly overcharged to pay for the welfare benefits of others. It was the only game in town and many people bought Obamacare coverage. Now President Obama and other Democrats make misleading claims about the number of people covered under Obamacare, but fail to acknowledge the many millions of people bought Obamacare plans because they lost their former plan or thought they had to or who are without coverage because they lost their employer paid coverage when they changed jobs or their work week was reduced to under 30 hours by their employer to avoid the Obamacare coverage mandate. President Obama didn’t tell Americans that a high percentage of the people who signed up for Medicaid or for Obamacare policies are receiving a welfare benefit. Now former President Obama and his cronies who designed Obamacare want to increase the penalty. In other words, if young people continue to elect not to purchase overpriced Obamacare insurance they should be punished by paying a penalty that the Supreme Court permitted as a tax to subsidize the welfare payments for others. The very existence of the penalty is proof that President Obama and the draftsman knew when they adopted Obamacare that the premiums and deductibles of Obamacare insurance plans offered to young middle class taxpayers were grossly unfair and that many young people would refuse to buy such plans even if they were given names of precious metals, namely, Silver, Gold, Copper and Platinum, to make them appear valuable. They wanted buyers to think they were being given a choice of coverage when there is no choice. They differ only in the choice of paying higher premiums to get smaller deductibles. Obamacare is so unfair that millions of people have elected to have no coverage and be subject to the penalty.

Every American needs access to healthcare. People with chronic conditions need the most expensive treatments, procedures and drugs. Prior to Obamacare we provided subsidized healthcare benefits for the elderly, the poor and the sick under Medicare and Medicaid and at hospital ERs, but many people were unable to afford health insurance because of ratings. We sought ways to assist such people by designing high risk pools. Obamacare was designed to ignore pre-existing conditions when setting premiums. But, we cannot afford to give and no-one should expect to receive unlimited healthcare for a small fraction of its predictable cost, which is what Obamacare attempted to do. A large number of people with pre-existing conditions now have coverage under Obamacare. Many of them were covered and continue to be covered under employer plans. Some of them are receiving hundreds of thousands of dollars of welfare benefits annually for a relatively small premium or co-pay. Those receiving excessive benefits under Obamacare, the Democrats, including President Obama, some Republicans who fear being involved with reducing a welfare benefit and the liberal press will protest loudly against any attempt to reduce the welfare benefits of Obamacare. Even if a special high-risk pool is created and the US government (and not the middle class and employers) contributes a substantial welfare benefit to subsidize those with pre-existing conditions, it will still be painful to people whose benefits are reduced when Obamacare coverage is not renewed and ends. To paraphrase Shakespeare, if it must be done, better it were done quickly. No-one was dieing in the street prior to the adoption of Obamacare. Hospital ERs have long been required to treat all patients and they currently treat many people with Obamacare, Medicare or Medicaid coverage who do not have immediate access to a doctor. Hospitals provide a significant portion of all healthcare benefits and their services must be paid for. Hospitals pass on the cost of all unpaid ER care (and all Medicare and Medicaid underpayments) by increasing the charges to those who pay. As a result the middle class and their employers were, prior to Obamacare, paying a substantial portion of the healthcare benefits provided at ERs for the sick and the poor, including documented and illegal immigrants. Rising healthcare costs paid by employers (which, including employee co-pays, now exceed $20,000 per employee) are largely responsible for the lack of wage increases during the last 10 years. Many ER patients work off the books and claim they are unable to pay. We should seek ways to collect ER payments due from those who hide their income.

Even if Obamacare is repealed, increasing ER, Medicare and Medicaid underpayments to healthcare providers threaten to continue to cause an increase in healthcare premiums and deductibles and further erode the quality and availability of care. The problems of Medicare which has many trillions of dollars of unfunded liabilities have been masked by the obvious failures of Obamacare. Medicare is a needed program for the elderly, but must be reformed before it causes more serious harm to our economy.

DON’T WAIT A FEW MONTHS OR LONGER TO PRESENT A PLAN TO REPEAL AND REPLACE OBAMACARE. DEAL WITH OBAMACARE IN STEPS. I APPLAUD YOUR EXECUTIVE ORDER TO END THE OUTRAGEOUSLY UNFAIR OBAMACARE TREATMENT OF YOUNG MIDDLE CLASS TAXPAYERS. YOU ARE CLEARLY CORRECT THAT ALL OBAMACARE MANDATES AND PENALTIES ARE UNFAIR AND SHOULD NOT BE ENFORCED. BUT, DO NOT RELY SOLELY ON THE EXECUTIVE ORDER. WE ARE A COUNTRY OF LAWS THAT SHOULD BE ENACTED, MODIFIED AND REPEALED BY CONGRESS. FOLLOW UP YOUR EXECUTIVE ORDER BY HAVING CONGRESS REPEAL ALL OBAMACARE MANDATES AND PENALTIES, EFFECTIVE IMMEDIATELY AND PHASE OUT REBATES AFTER 2017. IT CAN BE DONE IN A MATTER OF WEEKS. PRESIDENT OBAMA AND THE LIBERAL PRESS WILL ATTEMPT TO SET UP ROADBLOCKS AND WILL CRY THAT PENALTIES AND SUBSIDIES WERE AN INTRICATE PART OF OBAMACARE AND THAT REMOVING THEM WILL DESTROY OBAMACARE. PRESIDENT OBAMA CLAIMS THAT OBAMACARE IS A WONDERFUL IMPROVEMENT IN OUR HEALTHCARE LAWS WHICH HAS PROBLEMS THAT CAN BE FIXED BY RAISING THE AMOUNT OF THE PENALTY AND MAKING OTHER MINOR CHANGES. THAT IS JUST ANOTHER OBAMA LIE (LIKE YOU CAN KEEP YOUR DOCTOR OR YOU CAN KEEP YOUR PLAN) THAT MUST BE STRONGLY CRITICIZED. THE HIGHER THE PENALTY THE MORE UNFAIR OBAMACARE WOULD BE. RISING HEALTHCARE COSTS HAVE DESTROYED THE MIDDLE CLASS AND LEFT MILLIONS OF PEOPLE WHO REFUSE TO PAY THE EXCESSIVE PREMIUMS AND BE SUBJECT TO THE HIGH DEDUCTIBLES OF OBAMACARE WITHOUT HEALTH INSURANCE. FACE DEMOCRATS AND THE PRESS HEAD ON IN THE BATTLE OVER THE REMOVAL OF THE MANDATES, PENALTIES AND REBATES. READ MY ARTICLE ENTITLED PRESIDENT OBAMA’S DECEITFUL AND RELENTLESS SISYPHEAN TYPE PUNISHMENT OF THE MIDDLE CLASS AT SJFECONOMICS.COM. YOU MIGHT WANT TO COMPARE THE PUNISHMENT OF SISYPHUS TO OBAMACARE’S PUNISHMENT OF THE MIDDLE CLASS. OBAMACARE IS JUST ANOTHER SOCIALIST ATTEMPT TO TAKE FROM THOSE WHO EARN AND GIVE IT TO THOSE WHO NEED.

Without mandates insurance companies who conspired with President Obama by participating in the sale of grossly unfair Obamacare plans on the exchanges will incur even more significant losses on Obamacare policies due to expensive benefits given to people who had pre-existing conditions when they bought Obamacare plans. On the other hand, with the mandates removed, insurance companies, which were prevented by the Obamacare coverage mandates will be allowed to immediately start to design new insurance products to compete with Obamacare and seek the approval of state insurance departments to sell such policies. I expect that within a year no insurance company will offer an Obamacare policy. It will confirm and you should explain loudly and clearly by tweets that Obamacare was a hoax conceived and carried out by President Obama and the socialist Democrats with the assistance of the insurance companies to provide a secret welfare program for people with pre-existing conditions and a way for hospitals and other healthcare providers to recover some of their Medicare, Medicaid and ER underpayments (discussed below) by greatly overcharging the young healthy middle class and their employers.

Millions of people will be without healthcare coverage after the self-destruction of Obamacare, but the numbers will be exaggerated by Democrats. The outrage of Democrats claiming that you will be depriving 20,000,000 to 30,000,000 people of coverage has already begun. I believe that about 12,000,000 of them are on Medicaid most of whom should be allowed to keep their coverage as a welfare benefit. Many people with pre-existing conditions are covered by employer plans and will not lose their coverage. On the other hand millions of young people are currently without coverage or they or their employers are paying excessive amounts for coverage. Demonstrate that you seek to be the savior of the young middle class and their employers. We can expect that if healthcare costs decline raises will follow. Put together a group of brilliant actuaries to expose the truth about Obamacare. Have them present examples of young middle class individuals who are paying premiums of more than $10,000 with high deductibles that make their coverage worthless. Have them demonstrate that on an actuarial basis (and assuming a fair billing rate) young healthy middle class people should have paid only a few thousand dollars for a similar plan with a low deductible and including catastrophe coverage to protect against sickness and injury during the one year term. Have the actuaries give specific examples of individuals who were previously uninsurable and received hundreds of thousands of dollars of benefits under Obamacare while paying a subsidized premium of only a few thousand dollars.

AFTER REPEALING THE MANDATES, PENALTIES AND SUBSIDIES, IT WOULD BE A NO-WIN SITUATION TO TRY TO REPLACE OBAMACARE WITH A LAW THAT WILL BE BRANDED AS TRUMPCARE. LET AMERICANS KNOW THAT YOU ARE RELYING ON A REPUBLICAN CONTROLLED CONGRESS TO FIND A WAY TO REPEAL AND REPLACE THE REST OF OBAMACARE ASAP, BUT HAVE LEARNED THAT IT WILL BE EXTREMELY DIFFICULT. OBAMACARE HAS NOT ONLY INCREASED THE COST OF BUYING HEALTHCARE COVERAGE, BUT HAS ALSO SEVERELY HARMED MEDICAL PROVIDERS, REDUCED THE AVAILABILITY AND QUALITY OF CARE, AND INTERFERED WITH THE RELATIONSHIP OF DOCTOR AND PATIENT. REPLACE OBAMACARE BY BRINGING BACK FREE MARKET COMPETITION AMONG INSURERS UNDER STATE INSURANCE DEPARTMENT SUPERVISION. MINIMIZE THE ROLE OF THE FEDERAL GOVERNMENT TO RUNNING MEDICARE AND SUBSIDIZING MEDICAID AND TO A LIMITED EXTENT SUBSIDIZING COVERAGE FOR PEOPLE WITH PRE-EXISTING CONDITIONS. MAKE EVERYONE AWARE THAT OUR HEALTHCARE SYSTEM IS FAILING BECAUSE IT IS OPERATED AS AN OUT OF CONTROL WELFARE SYSTEM WITH ENORMOUS WASTE AND INEFFICIENCY. DOCTORS INCUR EXPENSIVE LONG TERM TRAINING AND SERVE AS UNDERPAID INTERNS AND THEN FACE RECORD KEEPING REQUIREMENTS AND PAYMENT LIMITS THAT PREVENT THEM FROM EARNING DESERVED COMPENSATION. THOUGH MOST HOSPITAL BUILDINGS ARE PAID FOR BY CHARITABLE CONTRIBUTIONS FROM WEALTHY INDIVIDUALS, MEDICARE AND MEDICAID PAYMENTS TO HOSPITALS ARE ON THEIR FACE INADEQUATE TO COVER OPERATING COSTS FOR THE SERVICES PROVIDED. AS A RESULT PROVIDERS CHARGE AN EXCESSIVE AMOUNT FOR THE SAME SERVICES PROVIDED TO OTHERS .

You should encourage Congress, the insurance companies and the healthcare providers to work together to promptly deal with replacing Obamacare, but stay out of the extremely complicated mess that Obamacare has created. It will continue to haunt healthcare for many years. We do not know if most employers will return after the elimination of the mandates to 40 hour work week jobs or offer healthcare coverage to low-income employees after the mandates are abolished. No matter what reasonable approach Congress makes to create high-risk pools, the press will report incessantly about the sad stories of people with pre-existing conditions who lost their Obamacare policy and died, or can no longer afford their healthcare coverage or a needed expensive drug. Parts of Obamacare that make sense like coverage under your parent’s policy until age 26 or the doughnut hole and Medicare and Medicaid changes included as part of the Obamacare can be expected to be considered by Congress and the insurance companies when they are creating new policies. Congress by finally enacting laws limiting malpractice claims will both reduce healthcare costs and make the practice of medicine more profitable and less stressful. We should also consider including sales across state lines, which will require controls on risk taking and adequate capitalization of insurers plus guarantees against the bankruptcy of insurers.

You have only a few months to get the insurance companies to come up with new policies and present them for approval to the state insurance departments if you wish to minimize the number of uninsured people at the end of this year. Get insurance companies to offer inexpensive catastrophe policies as soon as practicable in as many states as possible to healthy young people to offer them protection (even if the are currently covered by an Obamacare plan) against the risk of becoming subject to a pre-existing condition in the interim period while Obamacare is being replaced. We must get patients and healthcare providers involved with benefit choices and place reasonable coverage limits for all plans to encourage wellness programs and avoid wasteful healthcare demands. One way is to encourage expanded use of tax-favored HSAs and tax DEDUCTIONS to supplement healthcare plans with high deductibles. We might also allow HSAs that encourage savings for use with low deductible plans.

Employer plans often cover employees with pre-existing conditions, but the employee must remain well enough to continue to work. Portable catastrophe coverage insuring against acquiring a sickness or injury that would be viewed as a pre-existing condition should be required as part of all future insurance plans. Such requirement will, over time, reduce the number of people who acquire pre-existing conditions and are thereafter unable to afford healthcare coverage. Congress should determine whether employees who lose their coverage because their employment is terminated and who have become subject to a pre-existing condition should be entitled to remain on the employers plan at their own expense (that may be paid in whole or part by their new employer) or become entitled to purchase comparable insurance from a government subsidized high risk group.

Doctors have struggled with declining incomes and quality of life as a result of Medicare, Medicaid and Obamacare under-payments and complex paper work needed to comply with federal regulations and get paid for services. Many doctors have left the practice of medicine. Others have become employees of large hospital groups or medical practice organizations. We can greatly lower healthcare costs and improve outcomes. We should make greater use of clinics staffed by nurses and clinicians to reduce cost and alleviate the overcrowding of ERs by permitting hospitals to treat patients at clinics as well as ERs. Hospitals can improve care and reduce duplicate and unnecessary procedures by assigning a clinician, a nurse or a doctor to co-ordinate the treatment of each patient. To encourage students to become doctors we should expand the program offered by the armed services by providing medical school scholarships for individuals who commit to provide a designated number of hours of service before and after graduation at ERs and clinics.

EXPLORE A MAJOR CHANGE IN HEALTHCARE BY AUTHORIZING A 90 DAY STUDY TO CONSIDER PERMITTING HOSPITALS AND OTHER HEALTHCARE PROVIDERS TO CREATE INSURANCE SUBSIDIARIES AND OFFER INSURANCE COVERAGE OR A VARIETY OF CONCIERGE PLANS (THAT MIGHT BE TAX DEDUCTIBLE) TO COMPETE WITH THE PLANS OFFERED BY INSURANCE COMPANIES. HOSPITAL GROUPS ARE ALREADY EXPANDING TEAMS OF EMPLOYED DOCTORS THAT COULD PROVIDE THE SERVICES FOR SUCH PLANS. TO ENABLE HOSPITALS TO SPECIALIZE INSURANCE COVERAGE OR CONCIERGE PLANS COULD INCLUDE SERVICES OFFERED BY PARTNERSHIPS OF MULTIPLE HOSPITALS OR GROUPS OF PHYSICIANS.

In conclusion, I ask myself why a program so fraudulent as Obamacare can be defended by a large number of intelligent and successful people. Many of them are earning more than $250,000, are satisfied with their lives and are willing a contribute a small portion of their income to improve the lives of the sick and the poor. Many of them are clueless as the the damage to the middle class caused by such excessive premiums. Most of them have growing investment portfolios and have their healthcare paid by their employer. Unlike American capitalism which has relied on hard working individuals and endured for more than 200 years, no socialistic country has succeeded in the long run. Most people believe that we are a rich country. They ignore the surge in the National Debt to over $20 trillion coincidental with the increases in welfare and disability payments and the large number of people not working or paying income taxes. The slow conversion of our economy to socialism must be reversed and we must grow the GDP before our National Debt becomes unsustainable and our economy collapses.

2. THOUGHTS ON INFRA STRUCTURE CONSTRUCTION AND AN INTIAL CHANGE IN CORPORATE TAXATION

I urge you to ask Congress to immediately reduce the corporate income tax to 10% on repatriation of foreign earnings. It is a “no-brainer”. Make this a stand alone proposal with a sundown provision after two years unless modified in the expected comprehensive corporate tax legislation. Getting the remainder of your tax reduction plan through Congress expeditiously is important, but it may take more time than you think to do so. Hopefully the tax revenues from the repatriation of funds will immediately provide funding of about 100 billion dollars that can be applied to increase transportation infrastructure spending and propel GDP growth without increasing the federal deficit. Act quickly because the extra tax revenues are going to be offset in large part by two factors that have occurred following the presidential election, namely (i) the spike in US interest rates that will raise US government interest costs by $100 Billion for each 1/2% increase in rates as the National Debt is refinanced and (ii) the negative impact on the US trade deficit and corporate profits resulting from the increase in the value of the US Dollar. Bringing the money back to the US may further stimulate capital spending but the cash might be used for dividend increases and stock buybacks that provide lesser stimulus for the GDP. That is why I proposed corporate income tax changes in my book published a few years ago entitled “Perpetuating American Greatness After the Fiscal Cliff” (see pages 64 to 77 in the enclosed copy) to encourage corporate and private investment in partnership with government spending on transportation infrastructure through the purchase of “Jump Start America Bonds” which might now be called “Make America Great Again Bonds”. Individual and corporate balance sheets are much stronger than governmental balance sheets and are better prepared to finance transportation infrastructure.

I will in future letters comment on other parts of your 100 day plan and describe my plan for an interstate fresh-water pipeline project that could be the most important economic development of this century. Constructing a privately owned and financed fresh-water pipeline would create hundreds of thousands of jobs, add tens of billions of dollars to the GDP, reduce the federal deficit, provide water for farming and controlling wind fires, assist in flood control and lower ocean levels to mitigate any potential climate change. I will also propose a very simple proposal for a corporate income tax credit that will encourage immediate wage increases for non-executive middle class workers to stimulate economic growth, help recreate a middle class and generate increased long-term federal income tax revenues.