A Primer on Negative Interest Rates (Part 2)

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff discusses what negative interest rate policy means for retail bank customers and the recent plummeting of government bond yields into negative territory.

WILL BANK CUSTOMERS BE CHARGED NEGATIVE INTEREST RATES?

Central bank policy aside, one of the public concerns about negative interest rates is that banks will begin passing on their negative rate losses (charged by the central bank) to their customers in the form of negative rates on deposit balances.

There have been reports of banks in Europe charging more fees on account balances for very wealthy clients or even calling them negative rates, but the preponderance among average retail customers has been very low. Banks can still recoup most of their negative rate losses by tying free checking to other, more profitable financial services, trying to make up the losses with additional fees, simply lending more as the central banks want them to, or buying securities that produce a higher yield than the central bank’s negative rate.

But the greatest reason that banks are reluctant/slow to enact widespread negative rates on their customers is cash withdrawals. Depositors always have the option of avoiding those negative rates by withdrawing their money in the form of cash and stuffing it under the mattress.

Cash has a yield of zero which is a lot better than -1%. So both banks and the policymakers pressuring them know that pushing negative rates too hard on retail customers could backfire, badly. So much cash could be pulled out of the system that the broader money supply contracts and the policy produces deflation and less lending—the precise opposite of its stated objective.

(the Economics Correspondent will write in more detail soon about the cash option and so-called “war on cash” that many central banks and governments are drawing up to counter the cash withdrawal option)

Instead of small retail depositors, large commercial customers and wealthy individuals are more likely to be the first negative rate target of commercial banks since a major corporation holding, say… $500 million in a deposit account, is less able to convert its balance to cash than the average retail customer.

For a corporation, holding $500 million in physical cash is complicated and risky. It’s difficult to pay all the bills to suppliers, vendors, creditors, and employees using cash. It’s also dangerous and expensive to store that much cash in a vault or a room.

So banks, central banks, and policy makers know that in theory they could get away with a mild negative rate on very large balances since the costs of withdrawing cash and storing it, plus risks, would be greater than simply eating a modest negative rate of -0.1%.

Also, pushing negative rates on large corporate customers and wealthy individuals is easier to sell politically. After all, corporations and the wealthy have committed the sin of making and having a lot of money. Plus politicians can easily validate the policy by blaming both scapegoats for the sluggish economy because "they aren't doing their part to vigorously invest and spend their cash hoards on jobs.”

But once the public sees negative interest rates adopted as a widely accepted practice on large commercial and individual balances, they should worry. One of the necessary preconditions to moving on to smaller retail balances (the other being abolishing high denomination notes, as the 500 euro note has already been discontinued) will have been cleared and everyday retail bank customers will be closer to entering policymakers' crosshairs.

WILL BANKS START PAYING ME TO BORROW MONEY?

Some news articles have gone so far as to suggest current negative interest rate policy already means “banks will pay you interest to borrow.” And a handful of loan rates in Europe have been noisily reported as going negative. For example, very short-term mortgage rates (less than five years) in Denmark have gone slightly negative. However when factoring in processing fees that the lenders charge the effective rate is still slightly positive.

For the average retail customer being paid to borrow is highly unlikely although I wouldn’t rule it out completely in the long term. If central banks push negative rates down far enough, a bank could theoretically be willing to take a loss on a retail loan if the loss is smaller than letting its excess reserves sit idle and earn an even worse negative rate.

For example, if (heaven forbid) central banks ever charge member banks a more extreme negative rate of -3% on idle excess reserve balances, and a commercial bank was having trouble finding enough borrowers on 1% loan rates, it might consider lending at -0.5% since losing 0.5% a year plus charging processing fees is a lot more attractive than losing 3% a year.

However credit risk is still a major factor. A bank leaving its reserves idle eats a negative interest rate but it’s guaranteed to lose no more. Lending at a -0.5% rate might seem like a better deal, but if the borrower is a credit risk then the prospect of losing 25% or 50%, or all of the principal in a default might deter the bank from making the loan anyway.

In any event, the negative rates central banks are charging their member banks in Europe and Japan are hardly low enough to warrant widespread retail lending at negative yields. And in the United States, where the Fed is paying positive interest rates—approximately +1.8% on excess reserves at the time of this writing—the prospects of Americans being paid to borrow money are very remote (exception: Uncle Sam).

THE CURRENT SOVEREIGN DEBT PHENOMENON

However, paying someone to borrow is precisely what commercial banks in Europe have been doing… just not with their retail customers, but government debt instruments.

There's been a lot written recently about European government debt yields going negative and predictions that it may be coming to the United States soon.

In light of central bank negative rate policy it becomes easy to understand why. If a European commercial bank is paying a -0.5% rate on excess reserves to the ECB, yet it feels its pool of available borrowers is too risky to lend to at 1% or 0%, then it sees investment grade government debt (meaning not Greece), even slightly negative yielding debt, as a better alternative.

Given the bad choices of paying -0.5% to the ECB, or lending to risky borrowers, European banks probably view German government Bundesbonds as a good alternative. Yet with other European banks also chasing German bonds—in addition to central banks which are already engaged in large scale government bond purchases—the inflated demand can push the bond's market price above the principal or face value, drive the effective yield below zero, and banks will still buy it.

Click link to read Wall Street Journal column on "Germany for First Time Sells 30-Year Bonds Offering Negative Yields"

https://www.wsj.com/articles/germany-for-first-time-sells-30-year-bonds-offering-negative-yields-11566385847

Here’s a mathematical example using dollars instead of euros for simplification: A European bank might buy a two-year bond with a principal/face value of $10,000 and pay $10,420. Even though the bond pays a 2% coupon ($200 a year for two years or $400 which is a 2% rate), the bank ultimately only gets $400 in interest plus the $10,000 redemption for a total of $10,400. Since the bank paid $10,420 it loses $20 on the entire transaction or an effective yield of approximately -0.1%.

But losing 0.1% on a very safe debt instrument is better than losing 0.5% to the ECB, or losing 100% of the loan principal on a retail or risky commercial borrower who defaults.

Furthermore, the phenomenon of central banks plus commercial banks scrambling to buy whatever government debt they can find has led to a new and novel bout of bond speculation. Enter peripheral players: pension funds, insurers, and institutional investors who can plainly see the trend of central banks pushing negative rates lower and lower. And they are also buying negative-yielding government debt, not for the negative yield, but rather in the hope that they can sell it at an even higher price later… the equivalent of bubble-era house flipping, only this time with government bonds.

This is the screwy world that occurs when central banks go negative enough.

For a list of negative yielding bonds by country click this link.

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fstephenchen%2Ffiles%2F2019%2F08%2FJPM-negative-yield-matrix.jpg

It’s no coincidence that all negative yielding countries are either European or Japan as the ECB and BOJ are the prime instigators of negative rate policy, along with the Swedish Riksbank, Swiss National Bank, and the Danmarks Nationalbank.

With yields in Japan and Europe going more and more negative, banks are looking elsewhere for safe instruments and demand for U.S. Treasuries, already extremely popular even before negative interest rate policy began due to the U.S. dollar’s global reserve currency status, is rising.

Although the Federal Reserve isn’t engaged in negative rate policy on excess reserves, the consequences of negative rate policy in Europe and Japan are spreading to American shores. The prospects of this trend continuing is what has prompted market observers and even Alan Greenspan to predict that negative yields on U.S. Treasuries are an inevitability.

And this would of course please no one more than the U.S. government: both Congress and President Donald Trump (or any other president for that matter). What politician wouldn’t savor the idea of being able to borrow and deficit spend even more with less consequence? Imagine being able to borrow a trillion dollars to spend on buying votes and only having to pay back $980 billion ten years later!

Which presents another possible unintended and worrisome consequence: negative rate policy may encourage a new chapter of bloated government debt rising far beyond even the indefensible levels already prevalent in developed countries. Imagine giving more liquor to an alcoholic but this time paying him to drink it. The outcome is not likely to be good.

Of course one cynical view could be that negative government bond yields facilitating even more borrowing is a feature, not a bug, of negative rate policy. The Economics Correspondent, himself never a fan of central banks and their symbiotic relationship with governments, is very open to that theory, especially considering policymakers’ sincere but misguided belief that their negative rate policy is beneficial to the economy. If you think you’re both stimulating the economy while providing cheap financing to the very government that grants you a legal monopoly on currency and reserves issuance, how can you not view the result as a win-win?

In Part 3 we’ll take a close look at the so-called “war on cash” and see what strategies elite policymakers are already drumming up to force retail bank customers to eat negative interest rates on their deposits one day.

A Primer on Negative Interest Rates (Part 1)

Click here to read the original Cautious Optimism Facebook post with comments

5 MIN READ - Given CO’s recent spate of posts on negative interest rates, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff takes a brief diversion away from his series on Healthcare in America to address the recent unorthodox monetary policy.

Recently we’ve read a lot about negative interest rates in the news. Statistics abound about $15+ trillion in worldwide sovereign debt trading at negative yields. Alan Greenspan predicts negative interest rates on U.S. Treasuries are a fait-accompli. Other articles focus more closely on global central bank negative interest rate policy and predictions swirl that commercial banks will soon start paying borrowers to take out loans.

The purpose of this article is to define clearly what negative interest rate policy is, how it works, and to differentiate explicit negative rate policy from central banks from its spinoff effects, such as falling yields on government debt which are more an aftereffect than direct policy itself.

NEGATIVE RATE POLICY

First of all, where does the explicit policy originate from? The answer is simple: central banks.

In the fallout of the 2008 global financial crisis and global recession, many developed economies in Europe plus Japan have spent a decade crawling out of the slump plagued by extremely slow economic growth and subpar recoveries. While governments argued over fiscal policy—some calling for deficit spending, some for austerity, most spending and taxing more and calling it “austerity”—central banks have tried to pick up the perceived slack with monetary policy.

For the first several years of the tepid recovery, central banks the world over engaged in quantitative easing (massive securities purchases paid for with freshly printed reserves to load banks up with loanable funds) and zero interest rate targeting in the hope that businesses would be lured into borrowing on the cheap and banks would lend more generously. The belief was that the newly manufactured credit would stimulate recovery.

Central banks have also been obsessed with reaching inflation targets (usually somewhere around 2%) in the belief that inflation is necessary to stimulate credit and spending (both consumer and business) since someone who believes his money will be worth less tomorrow is more likely to spend, invest it, or borrow more today.

Central banks also want to jumpstart inflation to dilute the real value of their government's debts, although they will never publicly say so.

However if banks aren’t in a generous lending mood, all those QE reserves will do little to spur inflation since the broader money supply grows only when banks lend and increase their customers’ demand deposit balances.

Now the Economics Correspondent believes the entire premise of stimulating credit and 2% inflation targets is fallacious from the start—which may explain why the more countries have pushed interest rates down and used more and more radical means to stimulate lending the more disappointed they’ve been with the lethargic results. However the debate over how effective stimulative monetary policy and inflation are towards promoting growth can wait for another time. The purpose here is to explain the official justification behind and mechanism of negative rates.

So after years of zero rates and loading banks up with reserves—trillions of dollars more than they are legally required to hold to back up their deposit liabilities—some central banks decided to pursue more radical policies and experimented with negative interest rates.

What does that mean? Well it doesn’t mean (at least not for the foreseeable future) “banks pay retail borrowers to take out loans.” It also very rarely means “banks charge you negative interest on your deposit balances” although European banks may be reluctantly inching closer to that paradigm.

No, the first and most important salvo of negative interest rate policy was for central banks to begin charging their member commercial banks negative rates on idle reserves in excess of those they are required to hold (ie. so-called “excess reserves”).

Banks take deposits from customers (or obtain reserves from the central bank) and, in the United States, are only required to hold approximately 10% of those deposits in reserve while loaning the other 90% out. However if they cautiously choose to lend less and hold more in reserve, any balance above and beyond the 10% reserve requirement is considered “excess reserves” by the central bank.

During the Fed’s QE1, QE2, and QE3 the excess reserve balances of U.S. banks went through the roof: from virtually zero to a peak of $2.5 trillion in late 2014. The crisis-management policy goal at the time was to load banks up with reserves and telegraph a message to nervous depositors that their bank was in no danger of failing due to a bank run since they were holding vast quantities of reserves that could be converted to cash at any time. The huge excess reserve balances also served as an oasis of loanable funds that the Fed would urge or discourage commercial banks to lend or not lend whenever it wanted to stimulate the economy or hit the brakes.

So in light of world central banks becoming frustrated that commercial banks weren’t lending their own excess reserves aggressively enough, monetary policymakers in Europe and Japan began charging negative rates on excess reserve balances: starting at -0.1%.

To a commercial bank, this was a shot across the bow. A bank with, say, $100 billion in excess reserves sitting idle at the ECB knew that a year later it would only have $99.9 billion left, a loss of $100 million which is more than it sounds like when comparing it to the bank’s thinner profit margins. Thus an incentive was produced for the bank to lend more of that $100 billion out at a better interest rate than -0.1%.

After a year or so central banks became more aggressive. The rate on excess reserves was lowered further: to -0.25%, -0.4%, -0.5% and so on. Today the European Central Bank's (ECB) rate on excess reserves is -0.5%. Now the hypothetical bank's $100 billion excess reserve balance loses $500 million a year. The Bank of Japan’s rate on excess reserves is only -0.1%.

(see link for policy analysis of "pain" inflicted on European banks)

https://www.bloomberg.com/news/articles/2019-09-11/banks-wince-as-ecb-prepares-to-inflict-more-sub-zero-rate-pain

The Swedish Riksbank’s so-called deposit rate is a deeper -1.0% and has been negative since 2009 (uncoincidentally Sweden has inflated a new housing bubble). The Swiss National Bank’s so-called “sight deposit” rate is -0.75%. Denmark is also employing negative interest rate policy. Switzerland, Sweden, and Denmark all use their own currencies and don’t operate in the Eurozone common currency area.

Incidentally some news articles have reported that negative rate policy is designed to compel consumers and businesses to spend more. That’s mostly incorrect. The objective of negative rate policy is overwhelmingly to compel member commercial banks to lend more. While zero or near zero interest rates on savings and deposit accounts might motivate consumers and businesses to spend a little more, effectively positive rates won’t boost spending much and hardly to the levels that would result from charging retail and business bank customers a negative rate—something we haven’t commonly seen for reasons we’ll cover in Part 2.

HOW WELL IS IT WORKING?

The results of negative rate policy are mixed, but generally pretty poor. Policymakers in Europe in particular are having an increasingly difficult time justifying the procedure—especially in Germany, a nation of savers with a longstanding distrust of inflationary monetary policies.

One of the pitfalls of negative rate policy is that commercial banks might make riskier loans than they otherwise would—which increases the chance of defaults and possibly even crisis later. Ironically, should such a crisis occur politicians will automatically blame banks for lowering their lending standards.

The opposite risk is that banks may be reluctant to lend at superlow rates to what they perceive as risky borrowers and will elect instead to eat the negative rate—ie. make fewer loans or not lend at all since they can't charge a premium to compensate for the added risk. Monetary policy observers believe this calculus is already in play.

Banks may also choose to use their reserves to buy existing debt instruments instead—a form of lending only that it’s not new lending—and the newly injected money will simply spill over into asset markets, as it has in Sweden which is now experiencing a new housing bubble and the entire globe which is witnessing the makings of a sovereign debt bubble.

Austrian and classical economists have complained for a century that central banks forcing interest rates down artificially, unbacked by real public savings (ie. actual deferral of consumption), distorts economic calculation and misleads entrepreneurs into embarking on long-term debt-fueled business ventures for which inadequate saved resources actually exist. Negative interest rates, they argue, only distort coordination of saving and investment further.

Central bank governors the world over have complained that growth isn’t really picking up in their countries and vowed to do “whatever it takes” to stimulate more lending. Hence negative rates on excess reserves have gone lower and lower. Yet they are pushing further into uncharted territory and have no historical guide to properly assess the risks they’re creating with such radical policies.

WHAT ABOUT THE FED?

In the United States, the Federal Reserve has not implemented negative rates and it’s still very far away from doing so. Just last week the Fed cut its interbank lending rate to 1.75%—still very positive—and even the IOER (interest on excess reserves) rate only recently fell to +1.8%.

However the Fed does reserve the right to implement negative rates if it feels necessary. Most experts believe that would be in the aftermath of another deep recession like 2008-09. In fact Janet Yellen addressed the subject near the end of her term as Fed Chairperson before Congress, testifying that the Fed had no intention of enacting negative rate policy anytime soon but might consider it in a future slump if the governors felt all other policies were proving ineffective (see link for more info).

https://www.businessinsider.com/janet-yellen-doesnt-rule-out-negative-interest-rates-2016-5

In Part 2 we’ll discuss what negative interest rate policy means for commercial bank customers (retail and business) and government debt markets.

The Economics of Healthcare in America #2: Another Myth that Won’t Die: “U.S. Infant Mortality Rates are Among the Worst in the Developed World”

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6 MIN READ – The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is continuing his overseas holiday... which won't stop him from continuing the CO series on healthcare economics and disparaging the legend of America's allegedly subpar infant mortality rate.

CBS laments that "U.S. infant mortality rate
 worse than other countries"

In Part 1 of this Economics of Healthcare in America series we discussed why allegations that average lifespans in America rank among the lowest of industrialized nations are fictitious, and why in fact the USA is the best country in on earth for anyone interested in living as long as possible.

In Part 2 we examine another common false indictment of the American medical system’s allegedly poor outcomes: U.S. infant mortality rates are the worst among industrialized nations.

Here are a few typical headlines that propagate what is in effect a myth, most dispatched with socialized medicine or at minimum more government control of healthcare as the prescribed solution:

“Among 20 wealthy nations, US child mortality ranks worst, study finds”

-CNN, 2018

“America's Infant Mortality Rate Higher Than Other Rich Countries”

-Time, 2018

“Our infant mortality rate is a national embarrassment”

-Washington Post, 2014

“Why Infants May Be More Likely to Die in America Than Cuba”

-New York Times, 2019

“Newborn survival rates in US only slightly better than in Sri Lanka” (The Guardian—UK, 2018)

As is the case with average lifespans, the conclusion is derived from another example of ripe apples vs rotting oranges statistical comparisons, the gap between the apples and oranges being so expansive that it’s mindboggling anyone would use such statistics to draw infant mortality disparities at all. For example, the U.S. counts all infant deaths whereas other developed nations exclude many of their frailest births. Thus when overseas infants expire their deaths aren’t counted in what would otherwise be a subsequently raised mortality rate.

Most of the key differences in statistical collection methods can be found in three sources (links below):

-The Washington Times

-Science Daily citing research from Texas A&M University’s Medical and Public Health schools

-Occupational Medicine and Family practice Physician and health policy writer Dr. Walt Larimore

And although the COCEA enjoys authoring his own annotations for CO Nation readers, this column is an occasion where citations from those articles/studies will illustrate the vast differences in measurement methods between nations more capably than the COCEA’s own prose.

So as you read on, note that the gap between American statistical approaches and those of other advanced economies becomes so great that citing “the developed world's worst infant mortality rate” devolves into a proverbial farce. Anyone who invokes that rallying cry simply lacks even a cursory understanding of other nations’ lax measurement standards.

We begin with...

I. Establishing the definition of infant mortality:

“First, let’s start with the definition. The World Health Organization (WHO) defines a country’s infant mortality rate as the number of infants who die between birth and age one, per 1,000 live births...

“WHO says a live birth is when a baby shows any signs of life, even if, say, a low birth weight baby takes one, single breath, or has one heartbeat. While the U.S. uses this definition, other countries don’t and so don’t count premature or severely ill babies as live births or deaths.”

-Dr. Walt Larimore

II. “The CDC ranks the United States 27th of the 34 developed nations, with 6.1 infants of every 1,000 live births dying within their first year of life… [but] there’s a statistical explanation for America’s standing in the CDC rankings. It may be that Americans put a higher value on human life among the least fortunate among us. In most developed nations, premature births are recorded in the statistics as miscarriages or stillbirths. The lives that doctors in those places don’t attempt to save are never recorded as ‘live births.’”

-Washington Times

III. American doctors’ attempts to save premature babies yield higher official mortality rates that don’t burden countries that simply let their infants die:

“Many countries don’t try to save infants born prematurely or with severe birth defects. U.S. doctors go to extraordinary lengths to give these infants a chance at life. Such best efforts often fail, and the death becomes a misleading statistic…

“When the CDC excluded births before 24 weeks of gestation, the American infant-mortality rate fell from 6.1 infant deaths per 1,000 live births to 4.2, a number comparable to the rest of the developed world’s figures.”

-Washington Times

IV. Other countries exclude births under a certain weight or length while the U.S. does not:

“What counts as a birth varies from country to country. In Austria and Germany, fetal weight must be at least 500 grams (1 pound) before these countries count these infants as live births, [former NIH Director and former President and CEO of the American Red Cross Bernadine] Healy notes.”

-Washington Times

“In other parts of Europe, such as Switzerland, the fetus must be at least 30 centimeters (12 inches) long, [Bernadine] Healy notes. In Belgium and France, births at less than 26 weeks of pregnancy are registered as lifeless, and are not counted…”

-Dr. Walt Larimore

V. The U.S. counts babies that die within their first 24 hours of life while other countries do not:

“…Some countries don’t reliably register babies who die within the first 24 hours of birth…”

-Dr. Walt Larimore

VI. Excluding underweight babies from the statistics makes at least one of the “leading” nations’ mortality rates appear more favorable:

“Norway, which has one of the lowest infant mortality rates, shows no better infant survival than the United States when you factor in Norway’s underweight infants that are not now counted [source: Nicholas Eberstadt, American Enterprise Institute].”

-Washington Times

VII. Higher availability of fertility drugs in the U.S.—itself an indication of a more obliging system—skews infant mortality statistics:

“And the US has more mothers taking fertility treatments, which keeps the rate of pregnancy high due to multiple-birth pregnancies [which have lower survival rates].”

-Dr. Walt Larimore

VIII. Bad health habits of pregnant teens and expectant mothers drive infant morality rates up, but have nothing to do with the quality of American medical care:

“Plus, the U.S. has a high rate of teen pregnancies, teens who smoke, who take drugs, who are obese and uneducated, all factors which cause higher infant mortality rates.”

-Dr. Walt Larimore

IX. Once again comparing ethnic apples to apples produces more valid correlations than monitoring national averages since countries like Sweden, Japan, and Iceland don’t have large African or Native American populations that are more prone to SIDS:

“There are racial and ethnic differences in infant mortality that might help explain the differences between the United States and Europe. For example, African American and American Indian/Alaska Native babies are at higher risk of SIDS than Caucasian, Hispanic or Asian American babies. As most other developed countries have a comparatively small population with African heritage (and very few people of American Indian descent) these statistics might also help explain the numbers.”

-Science Daily

X. American ethnic diversity goes beyond just SIDS when counting infant deaths:

“The ranking doesn’t take into account that the U.S. has a diverse, heterogeneous population… …unlike, say, in Iceland, which tracks all infant deaths regardless of factor, but has a population under 300,000 that is 94% homogenous. Likewise, Finland and Japan do not have the ethnic and cultural diversity of the U.S.’s 300 million-plus citizens.”

-Dr. Walt Larimore

XI. The OECD warns that it’s misleading to compare countries with such widely differing methods for tabulating infant mortality metrics, but that doesn’t stop American socialized medicine proponents from doing it anyway:

“Even the Organization for Economic Cooperation and Development, which collects the European numbers, cautions against using comparisons country-by-country. ‘Some of the international variation in infant and neonatal mortality rates may be due to variations among countries in registering practices of premature infants (whether they are reported as live births or not),’ the OECD says.”

-Dr. Walt Larimore

XII. And finally more American infants die in car accidents per-capita than other developed nations:

The U.S. has a much higher rate of per-capita infant deaths in car accidents since car ownership and usage rates in the U.S. far surpass that of other industrialized nations. While infant deaths in accidents are a tragedy, they have nothing to do with the quality of America’s medical system.

-COCEA’s note

So when summing up all the ways in which other developed countries exclude infant deaths to pad their statistics, it’s plainly obvious that allegations the United States ranks near worst in infant mortality rates among developed nations are simply false.

When adjusting for such statistical differences, America’s much lower infant mortality rate reflects even more favorably when factoring out higher uses of infertility drugs (more readily available in the U.S. than in the allegedly superior medical systems of other countries) and high teen pregnancy rates and pregnant teen drug usage. Nevertheless the USA’s supposedly abysmal infant death rate endures as a perennial myth—dispatched from the lips of the establishment media to the ears of progressive readers/viewers who recycle it uncritically and repetitively.

And of course those statistical padding/differences between countries are never mentioned in those same news stories in an another example of FDR Secretary of State Cordell Hull’s famous quip that “A lie will gallop halfway round the world before the truth has time to pull its breeches on."

For more detailed reading on the art of statistically compiling infant mortality rates, go to:

https://www.washingtontimes.com/news/2014/oct/3/editorial-the-statistics-of-life/

http://www.drwalt.com/blog/2009/07/06/health-myth-1-“the-us-has-one-of-the-highest-infant-mortality-rates-in-the-developed-world”/

https://www.sciencedaily.com/releases/2016/10/161013103132.htm

ps. The COCEA chanced upon the infant mortality myth once again while reading “The Myths of Modern Medicine: The Alarming Truth about American Health Care” by healthcare consultant John Leifer. His insert credits include consultant to healthcare firms and founding a newsletter that featured contributions from Bill Clinton and Newt Gingrich. In his first chapter Leifer slams the U.S. healthcare system for its inferiority to countries with socialized medicine.

His proof?

You guessed it, a few paragraphs on America’s poor life expectancy and atrocious infant mortality rates. Nowhere was there any mention of America’s #1 ranking for life expectancy when comparing like ethnicities across developed countries (not even an attempt to dispel the counterargument, he just didn’t bring it up) or the widely different methods for calculating infant mortality in statistically stringent America versus laughably lax other countries. Instead Leifer simply writes “our national ranking of twenty-fifth in life expectancy” which places us “behind all the other rich countries and a few poor ones” and “our infant mortality rate, as measured against other wealthy nations, is the highest in the world.”

As a supposed “authority” on healthcare, one would expect Mr. Leifer to know better than simply peddling recycled one-liner myths without diving just a little deeper into the numbers. So what kind of expert is this author? Or does he really know better but prefers concealment and dishonesty?

Non-Economics Special Report: On the Ground in a Hong Kong Under Siege

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7 MIN READ-The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff has thus far limited his writing strictly to economics, but vacationing in Hong Kong he’s learned of developments "on the ground" that oblige him to briefly veer into international politics.... with compelling video.

Vacationing in Hong Kong I’ve been lucky to not yet see one demonstration, riot, or protest up close and personal (evidently the largest riots are a weekend-only excursion).

The extent of the dangers I’ve encountered is eating too much dim sum and enduring the sweltering summer heat and humidity... and being slightly ripped off by a Mong Kok street vendor who could tell I was too hot to bother bargaining. However there is a lot of anti-China and anti-government (Hong Kong) graffiti spray painted on buildings and highway dividers, and I’ve also walked down a breezeway where hundreds of protest posters and fliers adorn the walls with provocative slogans that would never be seen in mainland China.

However my own family members who have lived in Hong Kong nearly their entire lives (multiple aunts and uncles and cousins) have had plenty of opinions to share with me regarding the standoff between the government and the demonstrators.

Note first that the COCEA’s Chinese family fled China in 1949 just as Mao's communist army conquered the country. They have no love for the CCP and they are familiar with the underhanded tricks, tactics, and propaganda ploys that communists routinely play. They are not naïve about the nature of Beijing and they oppose both the controversial extradition bill as well as the multiple incursions the communist government has imposed on the freedoms of Hong Kongers since the 1997 handover.

The developments I convey here are from their observations and from the local news. I have confirmed most but not all of it. With the exception of one major television station the Hong Kong media are mostly free and not owned or influenced by mainland investors or the mainland government, and as evidence the local news coverage has been largely pro-demonstrator and anti-government.

DEVELOPMENTS ON THE GOVERNMENT SIDE:

-Many Chinese tourists visiting Hong Kong have been fascinated witnessing the marches, riots, graffiti, and anti-government posters and recorded the images with their smartphone cameras. However, when they return to the mainland—via Shenzhen or by air into multiple Chinese cities—customs authorities are inspecting all incoming smartphones for images or videos of civil unrest. If found, they delete them and subject the tourist to a lengthy interrogation. Beijing clearly doesn’t want any images of Hong Kong rebellion entering China for fear it will inspire its own citizens, many of whom don’t like the Communist Party either, to do the same.

-Cathay Pacific Airlines, which is minority owned by Beijing-based Air China, has been ordered to fire a handful of pilots and flight attendants for posting pro-demonstrator comments on their personal social media accounts. The Chinese government threatened Cathay Pacific that if they didn’t fire the workers and provide identification of crews working all flights into China then their flights would not be allowed to enter Chinese airspace. With China providing over 40% of Cathay Pacific's revenue noncompliance would bankrupt the airline.

-Cathay Pacific flights landing in China are now randomly being subjected to crew inspections by mainland customs authorities. The pilot and flight attendant ID’s are being double-checked to make sure none of them are on Beijing’s blacklist of troublemakers. The crew’s smartphones are also being searched to remove any images of civil unrest in Hong Kong. It’s not clear what punishment they’re subject to if the communist government identifies them as a subversive.

-Just yesterday Cathay Pacific, likely bowing to pressure for Beijing again, enacted a policy urging its employees to report coworkers who express anti-government sentiments. The policy echoes of the Stalinist Soviet or Eastern European Bloc days when millions of citizens were acting a secret police informers.

-The Hong Kong police have admitted to using some plainclothes officers dressed in black to blend into crowds of demonstrators and help the authorities weed out the biggest troublemakers.

-Taiwanese political advisor to Pingtung township Morrison Lee visited Hong Kong on August 18th and is now missing. The Taiwanese government is pressing Beijing on his whereabouts.

-Hong Kong residents visiting mainland China are now subject to greater scrutiny and interrogation than visiting Americans despite Hong Kong officially being “part of China.”

DEVELOPMENTS ON THE PROTESTER SIDE:

On the protester side a more surprising picture develops. My own family has almost unanimously turned against the radical demonstrators. They are against the communist government too, but I’ve been inundated with stories of protesters wreaking havoc on the city and initiating violence against both the police and innocent citizens. The offenses include:

-Among the 1-2 million largely peaceful protesters, a large minority contingent of blackshirts has routinely blocked major roads and highways. When the Hong Kong police attempted to physically pick them up and remove them they were attacked by the blackshirts. The more radical protesters accuse the Hong Kong police of brutalizing them and said they were only defending themselves from barbaric officers. It has become a he-said, she-said.

-The blackshirts have destroyed traffic signals in busy intersections hoping to create huge traffic jams or even accidents.

-Protesters have placed shopping carts on MTR and Express railroad tracks trying to create accidents.

-The protesters famously occupied the airport several weeks ago and got into a melee with police. Now the airport is closed off to anyone who can’t show an outbound ticket and passport or employee/airline credentials.

-Despite claiming to be peaceful victims at the hands of brutal police, blackshirts are routinely targeting police stations by completely surrounding them, besieging their occupants and then throwing eggs, water balloons, pineapples, and bricks at any police who try to step outside. A few weeks ago it was confirmed the protesters had upgraded to throwing petrol bombs.

-The protesters are now engaging in “hit and run” tactics, attacking a police station on one side of the city, disappearing and then attacking another police station on the other side of the city. The hope is to keep the police running around constantly and stretching the police force too thin to be effective. At dinner my cousin wanted to walk me a few blocks to see the wreckage and damage around the local police station but we ran out of time.

Keep in mind that traditionally the Hong Kong police force has not had a reputation for brutality. In fact Hong Kongers have dismissed their police almost as “rent-a-cops” in contrast to mainland China police who nobody in their right mind messes with. But suddenly in 2019 the police are being accused of barbarism. When this sudden contrast is pointed out protesters argue that the police are now being controlled by Beijing and told to carry out atrocities, but no disillusioned officers have blown the whistle or resigned at the prospect of suddenly being ordered to unilaterally brutalize peaceful citizens.

-A few weeks ago protesters surrounded and attacked the Kowloon Park police station and blocked Nathan Road (the major thoroughfare of Kowloon). Buses couldn’t move in either direction all evening. When the police tried to remove them chaos broke out. This is the night that a female demonstrator was famously hit by a police rubber bullet and lost her eyesight in one eye.

-A few nights ago the protesters attacked the Sham Shui Po police station, also blocking the road. A taxi driver got out of his blocked car and complained they were keeping him from his job and was beaten by the blackshirts. When criticized for attacking taxi drivers the common response has been “We’re risking our lives every day fighting for freedom, so beating up a taxi driver here and there is nothing.”

-Earlier this week the blackshirts had announced their intent to surround and attack Cathay Pacific’s headquarters building near the airport as revenge for firing the handful of pilots and flight attendants but called it off at the last minute, likely due to bad weather.

-Blackshirts have also attacked journalists that they felt weren’t reporting about them favorably enough, and also beat a Global Times journalist at Hong Kong airport that they “suspected” was a Chinese spy, at least one tourist who tried to run their airport gauntlet desperate to catch her flight, and beaten several policeman they have isolated.

https://www.todayonline.com/world/global-times-journalist-beaten-hong-kong-protesters-given-heros-welcome-after-discharge

Please view these brief videos filmed by bystander smart phones. These do not resemble peaceful demonstrators practicing civil disobedience and being victimized by one-sided police brutality:

https://www.youtube.com/watch?v=TXyPugcxzx4

https://www.youtube.com/watch?v=lcLnSSw0fTE

https://www.youtube.com/watch?v=eEyPGICzacw#t=01m38s

https://www.youtube.com/watch?v=J0mb6N1-z9o#t=00m26s

https://www.youtube.com/watch?v=fsYMznJdCok#t=00m08s

https://www.youtube.com/watch?v=qotPsIbhVyA

https://www.youtube.com/watch?v=r1QvK6m7yp4

Disclosure: the next video by CGTN is funded by the Chinese government, but I don’t see how the video isn’t truthful or relevant. The attacks on cars trying to navigate the blackshirt roadblock is a carbon copy of militant “critical mass” bicyclists attacking cars in San Francisco.

https://www.youtube.com/watch?v=eVjBLM-tzBU

-The protesters have also managed to obtain the personal information records (home addresses, family members) of over 1,000 police officers and posted them online.

-Monday, September 2nd is the first day of the school year both for grade level students as well as many college students. Authorities are already predicting many students will walk out in protest against the government and that out in the open they will become targets for recruitment by the blackshirt protesters. However the police are warning students who are the children of police to avoid blackshirts who they fear may target them as retribution against what they say is police brutality.

-I haven’t been able to confirm this, but my cousin says the goal of the most radical blackshirts is to provoke Beijing into sending the People’s Liberation Army into Hong Kong and producing another Tiananmen Square. The strategy is that the consequences on foreign investment and international business will destroy the Hong Kong economy and the Beijing government will back down. The blackshirts are now no longer demanding just withdrawal of the extradition bill, but also universal suffrage, amnesty for rioters, withdrawal of language describing them as rioters, and a commission of inquiry into police brutality.

I have been able to confirm most, but not all, of these developments via the local Hong Kong news. Although I don’t understand Cantonese and my family interprets for me, the images I’m seeing match the stories I’m hearing.

I asked my family if the communists might be planting agent provocateurs into the crowds disguised as blackshirts to orchestrate these attacks. They said it’s always possible, but there’s been no evidence so far because outsiders have a very difficult time speaking the Hong Kong dialect of Cantonese. A native mainland Mandarin speaker is given away as an outsider the moment he opens his mouth, and even a Cantonese speaker from nearby Guangzhou has a difficult time reproducing Hong Kong Cantonese.

LOOKING A LOT LIKE THE U.S.

Hearing these stories and watching these images, I was personally struck at just how much the radical blackshirt protesters look like Antifa in the United States. In fact, I would not be surprised if they have seen Antifa in action online and are drawing from much of the Antifa playbook to wreak havoc in the city. When I made this observation my relatives had no idea what Antifa is, but either way they are almost unanimously “fed up” (their words) with the radical demonstrators trying to tear the city apart.

I am no longer convinced that the situation in Hong Kong is a clear-cut case of peaceful, flower-carrying demonstrators being beaten up by savage police craving wonton acts of violence. The anti-government movement, which was and remains a just cause, is being hijacked by a sizable group of thugs who are effectively Hong Kong’s Antifa. They now seem to be motivated less by opposition to the extradition bill and more by exacting revenge and even beating up anyone they view as not 100% on their side.

Nevertheless, it’s likely the majority of Hong Kongers are still against the government—proven by the administration’s refusal to conduct public polling on the issue which suggests they know they will lose. The locals still side against the extradition bill and the government, not because they approve of the blackshirt tactics (they don’t and are getting sick of them), but because they hate what the communist mainland government is trying to do even more. Which is sad, because the longer the blackshirts attack and beat taxi drivers, block highways and shut down airports, the more support for the wider movement will falter.

What a shame. The communist government’s tightening grip on Hong Kong is a tragedy that is producing a slow motion death for all the world to see, and Antifa-like blackshirts are hurting the opposition cause.

ps. Most of the protester violence reported by local news is not being widely disseminated by the U.S. media, and images of blackshirts beating taxi drivers and journalists is definitely not getting much airtime in the West. At most the press reports “Police, Demonstrators Clash” or “Violence Erupts” with the same ambiguity they use when Antifa attacks Trump supporters but they don’t want to mention that it was Antifa who attacked first. It’s mindboggling in this age of instant information that the stories and images are being run routinely in Hong Kong but mostly ignored in the USA.

In many ways the reporting mirrors Tiananmen Square coverage in 1989, where western journalists were so in love with the story of unarmed, peaceful students standing up to the Goliath Communist Party machine that it affected their reporting. For example, historians now record that the Tiananmen students attacked the soldiers first, raining down bricks and cement blocks on PLA soldiers from overpasses on the outskirts of Beijing.

While bricks and cement blocks are no justification for PLA soldiers firing indiscriminately into crowds, the western reporting was 100% pro-demonstrator and journalists simply refused to run any story that might indicate the students were committing any wrongs of their own. Years later many journalists admitted they had let their feelings get the better of them and had not reported objectively.

When I contrast the behavior of Hong Kong’s radical blackshirts against the picture the western press paints of emphatic victimhood at the hands of the sadistic Hong Kong police, I believe the media are doing their readers/viewers a disservice. Hong Kong is still a story about a dictatorial communist government trying to subjugate a formerly free and vibrant metropolis, but it’s not about monolithically pacifist pro-democracy activists being wrongly persecuted.

The Economics of Healthcare in America #1: Where Individuals (not Averages) Live Longer Than Any Country on Earth (Part 2 of 2)

Click here to read the original Cautious Optimism Facebook post with comments

3 MIN READ - A followup healthcare dispatch from the Cautious Economics Correspondent for Economic Affairs and Other Egghead Stuff.

In Part 1 of this installment on life expectancy we explained why America is the best place in the world to be if you want to live a long time, and why headlines and arguments of “America has one of the lowest average life expectancies in the industrialized world” are statistically misleading, flawed, and used to misrepresent the effectiveness of America’s leading (but still overly expensive) medical system.

In short, the melting pot of America has large ethnic populations with shorter lifespans that pull the national average down below many other OECD countries. That is, countries like Sweden and Japan don’t have large African, Western Indian, or Eastern European populations that tend to live shorter lives. Yet life expectancy for Swedish-Americans is higher than the average of Sweden itself, Asian-Americans live longer than the Japanese, and of course Hispanic Americans have far higher life expectancy than any Latin American country including OECD members Chile and Mexico.

The COCEA suggests reading the earlier analysis in detail (link is at the bottom of this article).

However there’s more. Despite life expectancy by ethnicity already being higher in the USA than anywhere in the world, the U.S. average is artificially lowered by other unique factors that either 1) have nothing to do with the health system, or 2) are the product of government policy.

Accounting for those factors, America’s already world-leading life expectancy widens the gap even further from the rest of the world.

Here are a few of them.

I. The U.S. has a far higher incidence of premature deaths due to violence and traffic accidents than other developed countries. Violent deaths usually claim the lives of young men who, by virtue of dying young, disproportionately adjust nationwide life expectancy downwards. Also, since Americans own cars and drive longer distances on a per capita basis than citizens of other developed countries, they die at a higher rate in auto accidents.

https://www.forbes.com/sites/theapothecary/2011/11/23/the-myth-of-americans-poor-life-expectancy/

For example, the U.S. rate of auto deaths per 100,000 people is over double that of France and Germany (10.4 vs 5.1 and 4.1) and over triple that of Denmark, Switzerland, and the U.K. (10.6 vs 3.4, 3.3, and 2.8).

Since the average driver fatality age tends to be much lower than the average age of those who die naturally, traffic deaths also disproportionately lower average American life expectancy.

Health policy academics Robert L. Ohsfeldt and John E. Schneider (both Univ. of Iowa) recalculated average life expectancy factoring out violent deaths and accidents in all countries and official U.S. adjusted life expectancy—which had previously ranked #19 using the traditional statistical methods—leapfrogged to the top of the list.

II. Also, we all know Americans eat worse and lead more sedentary lifestyles than your average Swede or Japanese. These “bad habits” have nothing to do with the effectiveness of the healthcare system which overwhelmingly treats such patients only after the consequences of their lifestyle choices catch up to them. That Americans can place so well against the rest of the world even when engaged in such unhealthy behavior is actually a tribute to the strength of America’s medical system.

III. America’s statistical methods for calculating infant mortality are far more stringent than other developed nations. The result is far more actual infant deaths are counted in America, imposing a severe downward impact on average life expectancy while countries that statistically ignore those deaths are unaffected.

Another column detailing the wide variances in infant mortality calculations between the United States and other countries will be forthcoming in a future article.

IV. Finally, overall American life expectancy averages include citizens whose medical bills are overwhelmingly paid for by government insurance programs like Medicare, Medicaid, and state-level reimbursements.

According to the Census Bureau, some 118 million of America’s 330 million citizens received Medicare or Medicaid-paid services in 2015. And a little known fact is half of all healthcare spending in the USA is made by government.

It’s common knowledge that Medicare and Medicaid patients receive a lower standard of treatment from providers due to lower government reimbursements and payouts. Doctors, hospitals, and other providers universally spend more time, provide more effective procedures and services, and generally take better care of patients paying with private insurance than with Medicare and Medicaid.

Yet America’s average life expectancy includes the inferior results derived from Medicare and Medicaid patients. So if those programs are factored out and only truly private sector medicine and payments are counted, American life expectancy rises even further.

Which after all is what the underlying debate is about: health outcomes under private medicine compared to those under government-run healthcare. We don’t want to compare the 100% government British system with a 50% private/50% public American system. We want to compare the 100% government British system with the private-only portion of the U.S. system. On that account America wins by an even greater margin.

So even with all the life-shortening behaviors prevalent in America (bad diet, lack of exercise, violent deaths, auto accidents) and the statistical downward pressures applied by Medicare and Medicaid funded care, there is still no place in the world where you will live longer than the USA.

That is once again unless you’re an average—and not an individual.