February 17, 2012

Investor Protection

Perhaps it’s the great recession and the gradual pace of the economy's recovery that has uncovered them, but the number of suspect and unethical undertakings revealed in the financial services arena over the past few years is greater than anytime I can remember in my career.  While the dark shadow of these mischievous acts looms over my entire industry, I know that no level of regulation can guarantee that your money is being held by the ethical standards I believe it should.  Ultimately, the responsibility of insuring such rests on the investor.  Given my 19 years of experience, I offer some basic steps for investor protection. 

Before I get too far, let me clarify the subject.  These steps are intended to address the basic concept of custody and practical matters of ethics that anyone who has the responsibility of holding someone else's money should abide. This is not about a money manager's investment prowess, a subject I'll address in a future edition.  Simply stated, the following will help you validate if your money is where you think it is: 

1) Investigate and understand the institution that actually holds your money.  Do you recognize the name?  Did you or someone you trust read the disclosures on the account application?  Is the term hypothecation in the agreement?  What rights does the custodian have to borrow money from your account?  If you don't know or can't find these then ask the institution you’re considering to explain and verify.  If you don't understand their explanation, do business elsewhere. 

2) Are your accounts covered by Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC)?  SIPC deals specifically with investment accounts held at broker-dealers registered with the Securities and Exchange Commission.  SIPC’s role is to return funds and securities to investors if a broker-dealer registered with the SEC holding these assets becomes insolvent and it covers the first $500,000 held within your account.  The FDIC is an independent agency of the U.S. government and it protects depositors of insured banks.  The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. 

3) What insurance coverage does your broker-dealer have beyond $500,000?  Almost every large broker-dealer has coverage beyond SIPC and you should know the amount.

4) What investments do you actually own and are they being valued by the investment manager or a third party?  This subject can be tricky because many invest via mutual funds or private investments companies and their underlying holdings aren't publicly disclosed at all times.  Mutual funds are one of the most highly regulated investment vehicles, however.  In all my years I don't remember a single mutual fund that was able to commit fraud.  But to validate, take your fund symbol and type it into Yahoo Finance or Google.  That should give a good idea of what was in it last time it filed its holdings and how it’s invested.  If you don't get any results from the Web, call your broker and investigate.  Private investment companies/funds are more difficult as they are often invested in more exotic instruments than stocks and bonds and valuation is done by the money manager, which is difficult.  But private funds require accounting and are often audited.  Seek out the accountant and auditor before investing.  Be suspicious if the fund doesn't have either.

5) What underlying assets are in your money market?  Many money market funds have the ability to invest in non-Treasury instruments.  Funds often purchase commercial paper of financial institutions or sovereign debt of foreign countries.  In 2008, the Primary Reserve Fund "broke the buck" because it held Lehman Brothers’ paper which plummeted in value when they declared bankruptcy.  Many people consider money market the equivalent of cash.  But there are underlying assets in money market and you should know the risk.  For absolute safety, find a money market that can only invest in Treasuries.

6)  Ask your broker or bank representative exactly what they personally are invested in or where their money is held.  Our clients take comfort in the fact that we hold the same positions they do.  If your broker isn't doing something fairly similar to what you're doing you should ask why. 

Several cases have emerged of recent that demonstrate the greed and guile of those rotten few within our industry.  Be it acts of Madoff, Rajaratnam or the insider trading network currently under SEC investigation, they all tarnish our image.  But the motive for writing this article is the MF Global case.  While details are still emerging, it seems as if MF Global utilized regulatory rulings that few knew existed and coerced its regulator into continuing to permit questionable borrowing. 

As a commodities broker, MF Global was under the regulation of the U.S. Commodity Futures Trading Commission (CFTC).  The Commodities and Exchange Act of 1936 set forth that customer’s assets were required to be segregated from firm’s assets. (Be certain that everyone in the securities industry and the futures business knows the line between customer funds and broker funds is sacrosanct!)   However, firms could invest customer’s cash “in excess” but only in the safest assets, such as Treasuries.  But unbeknownst to many customers, a ruling in 2000 allowed MF Global to invest in sovereign debt of other nations as well, like that of Greece, Italy and Spain.  To top it off, a 2005 ruling allowed MF Global to lend themselves their customers’ cash in exchange for things like sovereign debt and it permitted them to do it without customers’ knowledge or consent.  The trouble is that when the value of the sovereign debt falls MF Global has to post cash to cover its loans, which they didn’t have.  If this is done by a broker that has SIPC coverage, then the aforementioned protection applies.  But MF Global was a commodities broker and there was no such protection.  Tragically, $1.6 billion of customer money is still unaccounted for some five months after its bankruptcy.  This differs from Lehman Brothers, as to my knowledge, all customer securities and funds were returned to the customer or transferred to another broker.  The ones who lost were people that invested in Lehman Brothers and its creditors, which all knew there was some level of risk.  

To me this is the most egregious violation of the fundamental ethics of our business.  What makes it even more disgusting is that it might just have been legal!  While my legal opinion is not much better than my branzino recipe, there is a very real chance that no one will be prosecuted for this despicable act.  Regardless, merely conceptualizing this act of circumvention reaches beyond the ethical standards of the financial services industry as it tears at the very fibers of morality.  Imagine conjuring up a way to borrow money from the very clients that keep you in business while not properly informing them that you are borrowing or that what you are doing with the borrowed money is speculative and there is no backstop.  The only solace I can find is that the executives that conducted this act will have to face themselves in the mirror, be it at their beach house or their penitentiary of jurisdiction, every day forward knowing that this conduct was simply wrong and that fact can't be contested. 

The vast majority of financial brokers and professionals exhibit the highest ethical standards and steward their clients’ funds to the best of their ability.  Client investment goals, be it a second home, early retirement or helping a child leave college debt free, are met every day.  But since these accomplishments garner no media attention, the positive things our industry produces are easily overshadowed.  Tragically, a few rotten apples somehow nudge their way in and occasionally linger for too long.  But the misdeeds of a few confirm the high code of ethics by which firms such as Warren Capital practice. Our clients trust we hold their interests above all else and they understand and appreciate our transparency and principles.  My proof is the number of referrals we get.  But as much as I think we should, I realize we don't hold every investment dollar out there and there are investors that choose to do business elsewhere.  So, I author this as a field guide to everyone with assets as I consider part of my duty as a financial professional to help implement basic standards of investor protection. 

As always, I appreciate your continued trust and confidence.

February 08, 2012

TRICKLE DOWN PACKAGING FOR SOAK UP RESULTS

Higher tax rates did not keep presidential candidate Mitt Romney from accumulating his wealth from 1984-1992 when he ran Bain Capital. Top income tax rates back then were higher than today’s 35%.

Other than 1991 and 1992 when top income tax rates were set at 31%, from 1984-1992 rates ranged from 38% to 50%. Capital gains rates were set between 21.2% and ordinary income tax rates (then 33%) vs. 15% today. Despite higher taxes, this was the time Romney amassed his fortune and supposedly created jobs as a private equity manager.

By 2006, when Romney left office as governor of Massachusetts, capital gains tax rates had been reduced to 15% theoretically in order to stimulate job creation. So how many jobs were created after 2006 in exchange for that generous tax rate?

The answer is not many and Romney wasn’t the only one choosing instead to enjoy his tax holiday. 1984-1992 capital gains taxes averaged 21.5% and income tax rates 39%. Unemployment averaged 6%. 2006-2011 both capital gains and income taxes were lower, averaging 15.5% and 35% respectively. Yet unemployment averaged 7.2%. Lower taxes did not accompany higher employment.

From 1984-1986 the capital gains taxrate was 20% and unemployment averaged 7.2%. When capital gains rates were raised from 1986-1990 from 20% to 33%, unemployment dropped to an average 5.9%. Then as tax rates were lowered from 1990 to 1993 from 33% to 21.2%, unemployment rose to 6.7%. The capital gains tax was held stable from 1993-2002 and unemployment averaged 5.22%. But, no surprise, from 2002-2011 when rates were lowered from 21.2% to 15% once again unemployment rates rose; this time averaging 6.5%.

Apparently “job creators,” when offered lower tax rates, prefer sitting back and enjoying their extra income. Or maybe at times when more flows to the bottom line, it pays to do more with less through “gains in productivity.” What has been sold as “trickle down” has proven instead to be a highly successful “soak up” economic policy.

Actually, I doubt there is a causal relationship here. There is no evidence people wait for a favorable tax environment to turn on their creative spigots. Whatever tax rates are, the right time to start a business is when there is a good business idea.

January 04, 2012

The Race is Long

This is a natural time of year for reflection, and here at Warren Capital we've been looking back on lessons learned in order to improve our practice.  Our challenge is that we can always find a competitor, or benchmark, or sector, or country, or asset, etc. that we'd like to have beaten but didn't.  But is that really the nature of our race?  If so, when does it end?    

When I started Warren Capital in 2005 my goal was to build a complete wealth management practice that increased the likelihood of clients reaching their financial objectives.  Whether it be monthly income, early retirement, a vacation home or saving for a child's education, our goal is to help our clients meet their aspirations.  This requires much more than picking good investments because clients have to file taxes, get life and health insurance and provide a home to shelter their families at the same time.  We know that helping our clients make good decisions on all these matters gets them to their goals.  So, we've spent most of the last year enhancing and building those practice areas.

While we've worked with clients on their insurance needs in the past, we are actively building our insurance and annuity practice under the direction of John Norce and Paul Barbieri.  Collectively, John and Paul have 45 years of insurance experience and are experts in their field.  We've also brought on John Walsh, CPA, to help our clients with taxes.  John has been a CPA for 33 years and handles personal and corporate filings as well as 401k administration for our clients.  Finally, I acquired an interest in a mortgage broker and we are financing mortgages at very low interest rates.  We are working with many clients in these new areas right now, but if we haven’t spoken to you about your needs, please give me a call. 

So, how did we do in 2011?  If you asked any of our clients that utilize our entire wealth management practice I believe they would say quite well.  What makes me most proud is that we had a few clients retire earlier than they thought they would. This proves our process works, and we are doing our job.   But I'm a perfectionist, and I'm always trying to find ways for us to do better.  So, in addition to expanding our tax, mortgage and insurance business, we've added a new investment technique that is already producing sizable results —shorting stocks.  In the past we've used our proprietary analysis to find companies we want to own but we didn't fully capitalize on the companies we believed were strategically disadvantaged or overvalued.  We now are doing such and will be launching a product that allows us to short in retirement accounts. 

It's easy to look at the S&P 500 which, after all the erratic headlines, ended the year unchanged and say very little was accomplished in 2011.  But in reality there is more than just this benchmark.  With our enhancements in the insurance, tax and mortgage arenas we've built an unparalleled wealth management practice that allows all financial matters our clients face to be handled in one place and to work in harmony.  This all came together in 2011, but it has taken many years to put all these pieces together as much time and substantial effort was needed to find the right people. So, as you look back on your year and set goals for the upcoming one, I encourage you to look beyond the calendar as accomplishments aren’t necessarily tied to such.  Whatever your goal, be it personal or financial, are you closer to meeting it?  Because the race is long, but in the end it is only with yourself. 

 Happy New Year and I appreciate your continued trust and confidence.

December 30, 2011

All is Quiet

November 22, 2011

Amortization

The word amortization comes from the Latin word admortire, which means, “to kill.”  Given the state of the housing and debt markets these days the derivation couldn’t be more fitting.   Regardless of the origin, understanding how an amortization schedule is calculated and the influence of such a calculation on things like the housing market could not be timelier. 

I’m not going to go through the entire amortization formula as it would take most of this piece.  But know that the interest rate, the number of payment periods and the principal balance are the variables that calculate the monthly payment.  (Visit our mortgage calculator at http://warcap.com/services/harmonyloans).  Those variables also dictate the amount of interest vs. principal allocated within each payment: the amortization schedule.  As you might deduce, the larger the number of payments (there are 360 monthly payments in a 30-year loan) the less principal allocated at the start of the loan.  The nature of this formula and the fact that very few homeowners or mortgage brokers understand the formula is a primary reason for the current state of the housing market in this country. 

Take a 30-year fixed loan for $500,000 initiated in November 2009 at 6%.  The monthly principal and interest payment would be $2,997.  While that is an important number, often mortgage brokers fail to properly explain that such a mortgage obligates the borrower to pay $579,190 in interest over the 30 years of that loan for a total repayment of $1,079,190.  Today a qualified borrower could get a 30-year fixed mortgage for about 4.3%.  While this is a significant rate difference, there is a dirty little secret hidden inside the option to refinance and most in the industry don’t want you to recognize it.

Two years of payments at $2,997 equals $71,928.  But because of the magic of the bank’s amortization formula, the principal balance of this loan after two years is $482,922.  Only $17,078 of $71,928 has gone to paying down the $500,000 borrowed.  Moreover, refinancing into a new 30-year fixed mortgage immediately subjugates the borrower to another 360 monthly payments and a new amortization schedule.  Under this scenario, after four years of payments totaling $129,480, the borrower would have a principal balance of $466,427.  When you add back the $22,000 of closing costs the borrower would have to pay for both loans the total reduction of debt is de minimis.  Here at Warren Capital, we believe this type of scenario should be avoided and we give our clients a much better solution.

Through our alliance with Mortgage Harmony Corp., we are able to offer our clients a unique type of loan that allows the borrower to reset their interest rate after they finance by simply clicking a button on their lender’s Web site.  If interest rates change after the loan closes, which they always do, you now have the ability to take advantage of that new rate without refinancing.  No credit check, no appraisal, no title work, no income or job verification and no new 30 year amortization schedule. 

Our job at Warren Capital is to build and protect our clients’ wealth.  Both asset and liability management are necessary to accomplish our job.  There will be times when asset growth will be limited because of economic circumstances.  During such times, you can be assured that we will use that opportunity to improve the other side of our clients’ ledgers and to make sure they don’t succumb to hidden financial pitfalls.  While this is a unique approach for advisors in our industry, we know it’s the right way to help our clients build their net worth. 

As always, I appreciate the continued trust and confidence.

November 15, 2011

Wishful Thinking

The Europeans have finally announced a solution to their debt problem: We Wish We Had a Couple Trillion Dollars. Now to peddle the plan to the Chinese, the IMF, the Brazilians and the Americans. None have yet expressed much interest.

It reads a bit like Dickens. The once wealthy, now profligate landlord, goes hat in hand, to who used to be his tenant, looking for a loan, promising to be more austere in the future.

Part of the deal calls for banks to revalue their holdings of Greek bonds to fifty cents on the dollar. But this is not to be labeled a default or else those who sold credit default swaps (CDS) as insurance against such an event would have to pay. Now if I’d bought bonds at 100 and was only to get 50 at maturity, I’d consider that a default. On the other hand, those who bought bonds at 30, where they were recently trading, may have scored a home run.

What did buyers of CDS get for their money? Probably a lawyer or two are lining up for the coupon date. Coming soon will be either huge payments settling, or write-offs against those trades. Perhaps interest rates should actually reflect the likelihood of default.

European sovereign debt is looking increasingly like the no-doc mortgages that helped blow up the housing industry. “Of course it’s AAA,”say the bankers. “Countries don’t not pay.” Privately however, the cost of Credit Default Swaps tell a different story. Once the bonds are sold the real game goes on in the unregulated markets of derivative trading where institutions bet on the likelihood of higher interest rates if not outright default. This has been highly profitable (so far).

Who’s next? So far the “agreement” cost Greece its government and leaves them with a ratio of debt to GDP, after the write-down, of a still unsustainable 120%. Attention has turned to Italy, where interest rates spiked to the highest since 2008 and have cost Silvio Berlusconi his job as well. Who is next in line? Will it be France or the US when the debt commission fails to find $1.5 trillion in savings over the next decade?

US markets initially rose on the day Europe gave voice to their wishful thinking. But that rally may have had more to do with US GDP being estimated higher at 2.5% and some fairly robust earnings announcements. So far twenty-seven of the thirty Dow stocks have reported third-quarter earnings. On average, earnings rose 22% on 13% higher sales compared to the same quarter a year earlier. This continues the good news from the second-quarter when earnings rose 14% on 10% higher sales. There is also some evidence bank lending is increasing.

Though Europe looks like they might be in one, the US may avoid falling back into recession. In the meantime, stocks are very inexpensive relative to interest rates.

September 14, 2011

Forget the Maestro, is There a Composer in the House?

Then and Now. Since September of 2001, the S&P has appreciated at a paltry annual rate of 0.5% despite corporate earnings expanding at an annual rate exceeding 11.5%. Even so, since 1900, the stock market has averaged six percent growth per year, excluding dividends.

A decade ago the US was in the midst of an economic slowdown, as S&P earnings fell from $53.70 in September 2000 to $24.69 by December 2001. The Fed, under Greenspan’s baton, lowered interest rates a dozen times, from 5.75% to 1.25%. By July of 2003 the unemployment rate began to subside from its 6.3% high. A year later, earnings finally bested the 2000 peak.

Following the score which reads, “In a slowdown, lower interest rates help stimulate the economy,” worked, earning Greenspan his famous “Maestro” moniker. Unfortunately the music has yet to be written for today’s show. Can Bernanke be both composer and maestro?

Today is not 2001. Earnings, rising since December 2009, are now within a few percent of the 2007 peak. Though stubbornly high, unemployment has been receding at a (what used to be called) glacial pace, since reaching 10.1% in October 2009.

What music might liven this sluggish economy? Or is this a problem of perception, where a slow patch gets all the publicity though a recovery is actually in place? Who is trumpeting the just reported quarter where earnings grew 14% on 10% higher sales?

QE2 bond buying kept short-term interest rates at zero and brought long-term rates from 4.5% to under 3.5%. But what was actually done for the economy? Credit card rates are north of 19% and small business loans are still hard to get. Corporations won’t put cash to work where there is little demand for products—meaning in the US or Europe. Pushing long-term rates from 3.5% to 2.5% may not change that equation much. Unemployed and under-employed cannot be expected to increase demand.

A chunk of the “stimulus” went toward balancing states’ budgets. Another chunk has yet to be spent. It was recently reported that balancing the Texas budget required Federal stimulus funds— to the tune of forty percent of their budget. Texas is not alone or the biggest recipient. The average state budget was balanced with 15% Federal assistance. With 1% GDP growth and the end of stimulus, states are going to be in dire straits for another few years.

The Fed can help set the stage for recovery by moderating interest rates. But low interest rates alone may not be enough. Another $500 billion infusion, even if passed by Congress, might do little more than help states’ balance their budgets again. It may be time for Keynesians to show some creativity.

September 12, 2011

Silver Lining

Since 1900, the stock market has averaged six percent growth per year, excluding
dividends. Seldom have stocks been priced as inexpensively as today. When at this valuation in the past, a year later, on average, the market was up over twice the historic average.

Most recently, in June 2009, a dollar invested in the S&P represented 1.7 times the yield on the thirty-year Treasury bond. A year later, the market had risen 28%.

 Today, with reported earnings of $85.18 and the S&P at 1169 (an earnings yield of 7.3%) the market is priced at over twice the 3.5% yield of Treasuries.

 The stock market has been similarly valued 46 times over the past century. Each following year, the market had rebounded sharply (with the exception of the early years of WWII). There are no assurances as to what the future might bring. But if things unfold the way they have in the past, this could be a very profitable time to own stocks.

There are ways, other than higher prices, for stocks to appear expensive, e.g. if interest rates soared above 9%, the market would no longer look as cheap in comparison. Or if a soft patch turns into full blown recession and earnings decline. There are three moving parts to this model: earnings are reported quarter by quarter, interest rates and the price of the market change moment by moment.

Most recently earnings have been reported for the second quarter and have generally been good. For the Dow Jones Industrial Average, earnings rose on average 14% on 10.5% higher sales. Not bad, but the market, concerned about where earnings might be next year in a slower economy, sold off some 15%. Money moved to bonds, driving the yield on the Treasury down from 4.7% to under 3.5%.

Irene blew her way up the east coast. While hurricanes aren’t known for doing much good, there may be one nice thing about a market decline; once again stocks are offered at a compelling price. Stocks are as cheap as they were in early 2009—at the recent market bottom.

September 08, 2011

How Far We’ve Come

This week marks the 10th anniversary of September 11th and given the economy, President Obama’s speech and the mantra of negativity gushing in the news, it’s easy to feel that the best days of the United States are behind us.  Frankly, when I originally sat down to compose this edition, I checked various equity market valuations 10 years ago.  But perhaps stock indices and unemployment rates are not the only measures to evaluate.

Most everyone has a vivid memory of what they experienced that morning in September 2001.  I certainly do as I was a managing producer at the Washington office of Morgan Stanley at the time.  What many forget is how fearful we were that another attack was inevitable.  But we stand here 10 years later without any such attack, and I think it important we recognize some things that have occurred under a blanket of security.

Ten years ago, Google wasn’t the first source of information and Facebook wasn’t a measure of status.  I find myself conducting a few searches a day, and such searches are an integral part of producing this newsletter.  Furthermore, I can now wirelessly conduct those searches, check positions and share my views thanks to my Iphone from Apple, AT&T’s network and Facebook’s reach.  This was just not possible in 2001.  Had our country not taken such a forthright stance after 9/11 by declaring a war on terror, the secure environment that helped produce these innovations we now use daily would not have been fostered and our country as well as the rest of the world would be completely different.  

It’s important to remember that 9/11 was an attack on individual liberties and on the democracy of the country that has served to advocate and protect such liberties around the world.  By defending democracy within our borders and advocating it internationally, not only were these innovations nurtured but the simplicity of these innovations —free access to information and worldwide connectivity — provided a platform for democracy to prevail over authoritative regimes like those in Egypt, Libya, and Iraq.  A decade that started with an attack on freedom ends with freedom more widespread than any time in history.   So, while the United States faces daunting circumstances right now, take a moment to recognize how far we’ve come.

Moving Forward

As a Washington D.C. based investment advisory firm, we have a unique perspective on the inner workings of Washington.  While we are not privy to any specific idea, we do have the opportunity to mingle with decision makers and their staff.  Given our interactions, we are concerned that many in Washington have very few creative sparks remaining to stoke the economy.  This in large part is due to federal budget constraints, but perhaps more significantly due to a lack of business experience among political leaders.  Since neither will change anytime soon, here are some immediate suggestions to promote growth WITHOUT adding to the deficit:

■ Create an infrastructure bank initially funded by new dollars printed by the Fed.  I’ve written about this many times, and it’s gathering some attention now.  Rather than buying Treasuries, the Fed could grant new money to the various federal departments or provide new money directly to the states for schools, roads, bridges, and the electric grid.    
■ Require more fuel efficient standards today.  Most manufacturers currently have 40 mpg vehicles and the technology for even higher standards.  Move all city buses to hybrid technology by 2015.  Create a better natural gas distribution network for long haul use. 
■ Open the Gulf of Mexico and Alaska to produce more energy. I realize this is a controversial issue but last year we sent $265 billion overseas via oil purchases.  I’m a staunch supporter of alternative fuels but we are several years away from mass use.  Until domestic alternatives replace overseas oil purchases I find it unreasonable for policy to restrict domestic production. Keep that $265 billion in the U.S. and the movement to alternatives will accelerate.
■ Promote tourism and streamline the visa process.  The dollar has fallen over the last decade and travel to the U.S. by internationals is cheap.  Furthermore, there is a direct correlation between population growth and economic growth.  We should promote immigration and properly document immigrants as their work will add to the tax base.

As always, I appreciate the continued trust and confidence.

Joe Warren is CEO and founder of Warren Capital Group, an independent financial advising firm specializing in wealth management for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services and financial planning. Warren Capital Group and its independent financial advisors are based in Washington D.C. Email Joe at jrw@warcap.com

August 22, 2011

The Only Game in Town

Back in Reagan’s day, the maximum tax bracket was 33% on a joint income above $74,850. A dollar back then bought what it takes $1.90 to buy today. So a 1988 income of $75,000 is equivalent to an income of $142,500 today. The 1988 federal budget of $1.1 trillion went as far as $580 billion goes today.

In the ‘80s income was income. A greater piece of overall national income was taxed at a higher rate than today. There was no special break for short-term capital gains or dividends. “Carried interest” had yet to be invented.

Back in 1988 the US population was 244 million. Today, for a population of 312 million, the budget provides services to 28% more people with a dollar that only goes half as far.

The makeup of the population was very different as well. Thirty years ago, today’s sixty-year olds were in their thirties—their prime earning years. Back in those good old days, today’s retirees (and soon to be retired) were major contributors to the coffers. Now we are rapidly becoming net drawers of Social Security, Medicare and pension promises. Retirees used to comprise 8% of the population, by 2020 that will be closer to 20%.

Reagan was a Keynesian. Ronald Reagan moved into the White House at a time of a stagnant economy. By the time he left office, the budget was almost 70% higher, necessitating raising the debt ceiling eighteen times. The deficit had doubled to $155 billion. George H. W. Bush left office, after lifting the debt ceiling five times, with a deficit almost doubling again to $290 billion.

Where one might say expenditures were too high, another might say tax receipts were too low. The widening gap between tax receipts and budget outlays was made up by issuing ever more debt. A solution lay in between.

Economic growth is the most important factor. Clinton, introduced two new tax brackets: 36% for incomes between $140,000 and $250,000, (equivalent to $176,000-$315,000 in today’s dollars) and 39.6% for incomes greater than $250,000. This, in conjunction with a robust economy expanding almost 50%, meant tax receipts more than caught up with expenditures and resulted in surpluses. Getting there required raising the debt ceiling four times.

Eight years and seven debt ceiling hikes later, because of two wars, a tax holiday, and an economic bust, the current president took office facing a deficit of $1.4 trillion.

How we got here.

Like Goldilocks we’ve tried too hot and too cold…. Two thirds of the debt accumulated since 1977 occurred during the Reagan and two Bush presidencies. “Borrow and Spend” years resulted in deficits. “Tax and Spend” (at a rate slower than the economy grew) resulted in budget surpluses, but is now politically unpalatable. If it’s time to try more “Create and Spend,” the Fed may be the only game in town.