Category Archives: Uncategorized

Barclays Bankers Bilk Their Clients

By Barry Elias | Thursday, 19 Nov 2015 10:45 PM

“Obfuscate and stonewall.”

That was a June 2011 directive from a Barclays managing director and head of automated electronic foreign exchange (FX) trading. It was the recommended response to inquiries from clients, the sales department, or virtually anyone else regarding bank transactions related to its BATS Last Look functionality, according to the New York State Department of Financial Services (DFS).

The managing director further stressed in the email that one should “avoid mentioning the existence of the whole system.”

Barclays’ “Last Look” functionality enabled traders to cancel the execution of client foreign exchange orders if they were deemed unprofitable to the bank, even if they would be profitable to the client.

Milliseconds became the difference as to whether a trade was executed profitably. Since it could take this amount of time to transmit an order across the globe, the bankers were at a disadvantage relative to the high frequency traders, who can execute within nanoseconds. Instead of quoting greater buy/sell spreads to accommodate potential price movements, which would disenfranchise the algorithmic traders, Barclays opted to possess the right of first refusal for the trade on behalf of its client.

Clients and others were not told the trade terminations were the result of this business policy decision. Senior employees instructed traders and information technology employees not to inform the sales staff of Last Look and the underlying policy. Instead, the information conveyed was vague, misleading, or inaccurate – and sometimes they were not given any explanation. Blaming the malfunction on technical latency issues was a recommended strategy from management.

This case was unleashed during the forex rigging probe, for which Barclays agreed to pay about $2.4 billion to the DFS, the U.S. Justice Department, and other agencies, which included $485 million for its manipulation of forex spot trading. This settlement was part of the more than $5.6 billion agreement by six banks for manipulating the $5.3 trillion daily foreign exchange market. The other five banks include Bank of America, Chase, Citigroup, JPMorgan, Royal Bank of Scotland, and UBS.

Barclays recently agreed to pay $150 million to resolve the “Last Look” allegations of abuse in the foreign exchange market through its electronic trading platform: a very serious charge, since it intentionally sought unfair advantages over clients and counterparties through this venue. The DFS also required the bank to fire its global head of electronic fixed income, currencies and commodities automated flow trading. Barclays has not named the dismissed individual and has admitted to wrongdoing in this case.

This settlement will bring the total litigation provisions for Barclays Bank to about $13 billion since the beginning of the financial crisis. Litigation costs for all financial institutions since 2008 have reached nearly $219 billion, most of it borne by U.S. banks, led by Bank of America with about $70 billion, according to Moody’s, a rating agency. They expect more to come, especially from Deutsche Bank’s exposure to foreign exchange litigation and the Royal Bank of Scotland’s exposure to U.S. mortgage litigation.

Barclays is still not off the hook: It is being investigated for other potential misconduct, including possible manipulation of precious metals markets and payments to Qatari investors in its 2008 rights issue.

Even after the crisis, Barclays continued down the road not to be traveled.

© 2015 Newsmax Finance. All rights reserved.


The Fed Is Becoming Less Relevant


By Barry Elias | Friday, 11 Sep 2015 11:40 AM

The Federal Reserve implicitly acknowledges that it is ill-equipped to fulfill its dual mandate of optimizing the levels of inflation and employment in the broad economy.

The Fed was charged with these objectives when the Humphrey-Hawkins Full Employment and Balanced Growth Act became law in 1978.

Now, the Fed believes employment is a non-monetary phenomenon — as I have and still do.

In their Statement on Longer-Run Goals and Monetary Strategy, the Fed recognizes that “maximum employment is largely determined by non-monetary factors that affect the structure and dynamics of the labor market.”

They also understand that these factors “may not be directly measurable.”

Alan Blinder, an economics professor at Princeton and a former vice-chairman of the Fed, claims the Fed is “clueless” about the growth of labor productivity. Despite lackluster growth of 0.65 percent each year on average since 2010 — and only 0.3 percent last year, excluding farming — the Fed anticipates productivity to grow at approximately 1.75 percent annually: a very unrealistic projection.

The Fed also recognizes that inflationary data and projections are not well understood. James Bullard, President of the Federal Reserve Bank, recently said, “There is definitely less confidence, a lot less confidence” in how inflation operates.

The Phillips Curve, an economic model that posits the rate of inflation and unemployment move in opposite directions — e.g., high unemployment suggests low inflation — has not been empirically accurate in recent years.

The rate of Inflation has declined less than expected following the financial crisis when unemployment hovered near 10 percent, and is now rising less than expected — currently below 2 percent — as the unemployment rate has fallen to 5.1 percent and labor demand is at record levels, with 5.8 million job openings advertised in July.

(While inflation for goods and services remain low, expansionary monetary policy has inflated financial assets, thereby increasing income and wealth inequalities to near historic levels.)

Economists are reevaluating the inflationary model based on behavioral psychology and empirical data. Simon Gilchrist, a Boston University professor, and Egon Zakrajsek, a Fed board economist, suggest when cash and credit levels dwindle during financial crises, firms may actually increase prices in the short-term, even if they risk the loss of long-term customers.

This dynamic would especially apply to essential products and services, such as food, energy, healthcare, and residential rent.

Stanley Fischer, Vice Chairman of the Federal Reserve, suggests currency exchange rates play an important role in formulating monetary policy as well.

There is now evidence that the strong U.S. dollar may not necessarily translate into lower import prices and domestic inflation in the U.S., as compared with other countries.

For a long time, many economists believed that inflationary expectations are critical in forecasting future inflation. These expectations are typically represented in bond yields, with low rates suggesting low inflation going forward. The low government bond yields of late suggest low inflationary concerns from the market, which might contradict the Fed’s intent to raise interest rates soon.

Given this information, the Fed “should be a little more uncertain about forecasting inflation than it was,” says Athanasios Orphanides, a former governor of the Central Bank of Cyprus, a Fed economist, and a professor at the MIT Sloan School of Management.

Alan Greenspan, former chairman of the Federal Reserve, says fiscal policy, or the government’s tax and spending programs, is more important than central bank monetary policy, and the Fed will “become utterly irrelevant” if lawmakers undermine their fiscal responsibilities.

The Fed has limited tools to work with. Adjusting interest rates and the money supply is insufficient to deal with fiscal issues, such as federal debt and income inequality.

Blinder believes the importance and power of the Federal Reserve is overstated, and they can only address these “around the edges.”

If they are uncertain as to the cause of price movements, how can they know when to adjust interest rates and by how much?

Further, the Fed needs to be thinking more outside the box. Unemployment levels may be less important than other parameters. In May 2004, when employment was at 5.6 percent, the Fed believed this signaled a near onset of rising inflation and the need to increase interest rates.

The effective federal funds rate then rose from 1 percent in May 2004 to 5 percent in June 2006, while the unemployment rate fell to 4.6 percent.

However, this large, rapid rise in rates precipitated the financial crisis. The quantity of outstanding adjustable-rate subprime residential mortgages was so large that many homeowners no longer maintained the income to support the huge increase in monthly debt service payments — causing significant and rapid sales to meet cash flow obligations, depressed prices, excessive foreclosures, and a dire economic recession.

The Fed also needs to be prescient of global economic developments. The recent Chinese economic slowdown may have enormous impact on emerging economies as well as the U.S. in terms of lower imports and weaker commodity and energy prices.

Monetary policy is experiencing diminishing returns, and fiscal reform is the best tool we have to resuscitate our economy. My tax proposal is a good place to begin.

© 2015 Newsmax Finance. All rights reserved.

China Economy May Drag World Down

This article was originally published on December 16, 2011.

As China goes, so goes the world.

My column of June 24, 2011 (“China Yield Inversion May Portend Economic Slowdown”) opened with the following sentence:

“The yield on Chinese bonds are inverting at an accelerating rate. This does not portend well for the Chinese economy, and this may have negative implications globally.”

China’s contribution to global economic growth this year is nearly 40%.

The reason: property construction in China boomed significantly during the previous decade.

The Chinese government controls all the allocation of land. Beginning in 1998, Chinese authorities permitted individuals to buy the “right” to use property for 70 years. Domestic capital controls, which limited investment outside China, increased demand for this asset.

As a result, property construction boomed. The increased supply resulted in high levels of employment, income, and demand for residential and commercial properties.

The problem: insufficient demand to absorb the excess investment in property development.

According to the National Bureau of Statistics in China, real estate development for 2011 will total nearly $1 trillion, a 32% increase over last year. This investment represents approximately 15% of GDP, as calculated by the World Bank.

According to Jonathan Anderson of UBS, this is “the single most important sector in the entire global economy, in terms of its impact on the rest of the world.”

The reason: significant, productive economic activity is dependent on this sector.

Forty percent of Chinese steel use is related to property construction. China produces more steel than the next 10 steel producing countries combined, deeming it the most important procurer of iron ore, a key input for steel manufacturing.

Other essential steel manufacturing inputs are copper, cement, coal, and power generation. These activities generate a significant amount of income that is used to purchase global products and services.

Today, the average home price in China equals 9 times average annual income. The price for luxury apartments in Versailles Residentiel de Luxe La Grand Maison, located in the city of Wenzhou, are 350 times average annual income.

The perspective: at the peak of the U.S. real estate bubble, this ratio was 5.1. It is currently near 3, the historic average.

Using the current income level in China, real estate prices would need to fall by two thirds to be sustainably priced. Should income rise 50% in the coming decade (4% per annum), prices could fall 50% to achieve a stable equilibrium.

In the past year, real estate transactions (sales) and prices have fallen dramatically. At the current rate, prices may drop 50% within over the coming decade.

This decline has been due to low income demand at the current price level and the tremendous supply of inventory (approximately 20 years based on current vacancies, pending projects, and future population projections).

Demand for property development is decreasing. Less construction translates into lower income, personal, corporate, and governmental (local government derives 40% of its income from property sales). Smaller incomes suggest lower demand for global products and services.

In addition, lower property values imply less collateral for future credit, thereby limiting growth prospects.

This portends poorly for the global economy.

China’s annual trade surplus has been halved since 2008 to roughly $150 billion. This reflects a decrease in export and import growth, with exports declining at a greater rate. This decline is partially a manifestation of decreased demand by the eurozone and China’s domestic market.

In recent years, China increased the required reserve ratio for bank deposits to limit monetary growth, reduce aggregate demand, and minimize inflationary pressures.

However, due to the impending global economic slowdown, China recently reduced the reserve requirement to foster economic growth.

Deleveraging of the massive global debt, which is 3 times global income, will reduce monetary velocity (transactions) and income over the next decade.

Increases in monetary aggregates, credit, and liquidity may provide meager assistance in the immediate term.
In fact, it will delay, and possibly exacerbate, the underlying economic dysfunction, thereby extending anemic global growth for years to come.

Moreover, the increased money supply, without much increase in value added product supply, will increase transaction demand for existing products, thereby placing upward price pressures.

Lower government revenues may require additional debt issuance at higher interest rates to attract scarce capital. Existing economies of scale may not be sufficient to offset a possible increase in borrowing costs. Upward pressure on retail prices may result, creating an inflationary spiral.

Global stagflation may be the new paradigm over the coming decade.

© 2015 Newsmax Finance. All rights reserved.

China Yield Inversion May Portend Economic Slowdown

This article was originally published on June 24, 2011.

The yield on Chinese bonds are inverting at an accelerating rate. This does not portend well for the Chinese economy, and this may have negative implications globally.

An inversion of the yield curve occurs when short-term interest rates are higher than long-term interest rates.

Typically, the opposite occurs, since long-term investments are associated with more risk. Additional risk, such as price inflation, currency depreciation, default, and lost opportunities, cause investors to demand higher rates of return for longer-term investments.

An inversion of the yield curve is usually the result of an anticipated slowing of future economic activity over the coming year or two. This anticipation is reflected in lower demand for short-term corporate debt, which simultaneously depresses prices and increases rates for this debt.

In addition, this prognostication is followed by decreased demand for corporate equities based on unfavorable business conditions and lower profit potential in the near term (one to two years).

The China yield curve, which has been inverted for nearly six months, continues to move in this direction with greater velocity.

The Shanghai Interbank Offer Rate (SHIBOR) is the short-term rate of interest that Chinese banks are willing to lend other Chinese banks. The current rates for one week, one month, three months, one year, and 10 years are: 9 percent, 8 percent, 6 percent, 5 percent, and 4 percent, respectively.

Note: The longer the term, the lower the rate.

In the past 50 years, this indicator correctly predicted all but one economic slowdown.

The identical scenario occurred in the U.S. in February 2007 prior to the financial crisis. At that time, the yield for the two-year Treasury note was 4.93 percent, while that for the 10-year Treasury bond was 4.81 percent.

The National Bureau of Economic Research (NBER) determined the economic recession began in December 2007, 10 months later.

The reason for the Chinese yield inversion: the currency exchange rate mechanism

Since 1980, China has purposely devalued its currency (yuan) to increase the demand for its export products. When the Chinese yuan devalues, the yuan is equivalent to less foreign currency. Therefore, an export product priced in yuan requires less foreign currency, which translates into more demand for Chinese exports.

In 1980, the U.S. dollar purchased 1.50 yuan. By 1994, it purchased 8.46 yuan. Today, the rate is 6.50.

The Chinese do not allow the market to adjust the currency exchange rate: it is determined by government policy. The low relative value of the yuan has increased demand for Chinese products tremendously. This has created a huge demand for yuan and an inflow of foreign currency reserves (approximately $3 trillion).

The increase in demand would typically increase the value of the yuan, bringing supply and demand into equilibrium. Since, the currency exchange rate remains fixed, demand for yuan exceeds supply. Therefore, the Chinese create yuan to satisfy the demand.

Wu Xiaoling, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress, recently said, “In the past 30 years, we have used excessive money supply to rapidly advance our economy.”

China has the highest ratio of broad money (M)-to-income (GDP) in the world. This suggests there is an excess of money and a lack of transaction velocity (V), since GDP = M times V.

During the past decade, the broad money stock in China increased nearly 20 percent per annum, while real GDP grew at 10 percent per annum. In the U.S., money and income growth per annum were only 5 percent and 3 percent, respectively.

The large quantity of money has created an increase in demand for many asset classes, including land, housing, and commodities. The result has been an increase in asset prices. urrently, annual inflation is approaching 5 percent.

Inflation and inflationary expectations portend future uncertainties and risk. This unfavorable climate reduces demand for foreign and domestic investment as well as domestic exports.

To combat inflation, China is attempting to reduce the quantity of money available by increasing interest rates and required bank reserves (20 percent of deposits). The former restricts demand for loans, while the latter restricts supply of loans.

Ironically, further threatening growth and income are the downward price pressures on commercial and residential real estate. The former has excess supply and the latter has deficient demand

Price depreciation of these assets will likely dampen collateral values and reduce the supply and demand for loan and credit activity. This suggests a reduction in economic activity and income.

These dynamics indicate an economic slowing in the near term (one to two years) as money is removed from the system. The business environment may be less profitable, which may depress equity prices in the near term as well (one to two years).

This may have negative implications globally as well.

As excess money is removed from the Chinese system, velocity will increase, permitting more stable, long-term income growth.

© 2015 Newsmax Finance. All rights reserved.

Middle-Class Jobs Still Remain Elusive

The middle class continues to suffer during this economic recovery.

The U.S. Labor Department typically releases employment figures for the overall economy and particular industries.

However, these data exclude the income levels associated with these opportunities – a highly critical parameter.

Since the inception of our Great Recession, middle class jobs have yet to recover – far from it – while those at the upper and lower ends are ahead of the pre-crisis period, according to Georgetown University’s Center on Education and the Workforce in a recent study that focused on 485 occupation groups.

The middle third of workers shed 2.8 million jobs from 2008 through 2010, while those in the top third lost 1.9 million positions and the bottom third suffered a loss of 1 million opportunities. Since 2010, the middle class gained 1.9 million jobs; the upper class gained 2.9 million positions; and lower class opportunities grew by 1.8 million.

Nearly all of the 2.9 million high wage positions – or about 2.8 million – went to individuals with at least a bachelor’s degree. The net employment result since the beginning of the recession was a loss of 900,000 middle income jobs; a gain of 1 million high wage positions; and an increase of 800,000 low wage opportunities.

This Georgetown analysis defines high wage earners as full-time employees with salaries of at least $53,000 on average. More than two-thirds of these workers receive employer-provided health insurance and slightly less than two-thirds have employer-provided retirement plans. Occupations in this sector include financial analysts, physicians, registered nurses and software developers.

Those in the bottom third earn less than $32,000 on average. Only one-third in this group have employer-provided health insurance and only one-quarter receive employer-provided retirement benefits. Middle-wage occupations have average earnings between $32,000 and $53,000, and include occupations such as automobile mechanics, truck drivers and welders.

Growing the middle class is essential for robust, long-term economic growth. Unleashing our potential in the energy sector can move us in that direction, as I described in a previous article here.

Developing molten salt reactors will enable energy independence for a virtual eternity that is safe, efficient, affordable, and carbon-free while generating a great number of middle and upper-level jobs over long periods of time.

Coupled with my tax plan, strong economic growth can become a way of life.

© 2015 Newsmax Finance. All rights reserved.

Bitcoin Surges as Predicted

By Barry Elias

June 21, 2014

On April 11, 2014, I penned a piece for Newsmax suggesting a positive prognosis for bitcoin.

The previous day, the price of bitcoin closed at $360.84, according to Coindesk, a digital currency publication.

Within 5 days, the price rose nearly 50 percent.   On June 3, 2014, the price was $665.73, an 84 percent increase.

The current price of bitcoin is $588.52, a 63 percent gain in slightly more than two months.






The End of Federal Taxation as We Know It

By Barry Elias

The way we tax is obsolete.

It’s safe to say, in the century since the federal income tax was instated, the system has become broken.  The complex, voluminous tax code (included in the 70,000+ page CCH Standard Federal Tax Reporter) needs a revolutionary overhaul.

The current system doesn’t raise nearly enough money, social security is nearing insolvency, the administrative cost is exorbitant, and economic growth is actually impeded.

The purpose of the federal tax is to collect enough revenues to foot the government’s annual expenditures: nearly $3.5 trillion in fiscal year 2013.  Last year we only collected $2.8 trillion. The shortfall must be borrowed, and we pay interest on that debt.

Furthermore, we forgo tax revenue due to deductions, exclusions and other preferential tax treatments.  Last year alone, that amounted to $1 trillion. New types of transactions have spawned an underground economy that is valued at close to $2 trillion per annum, which goes completely unreported. Consider teenage babysitters, sales on eBay, the room above your garage that you rent to a college student, domestic help, sales of Bitcoin, lemonade stands, illegal drug deals….the list is endless.

We estimate an annual loss of $400 billion of tax revenue. In addition, Social Security taxes are only collected on the first $117,000 of earned income. The professional athlete earning $10 million, for example, pays no Social Security tax on nearly 99% of his pay.

To make matters worse, complying with the current arcane system (that looms as a nuisance on our calendars in the months leading up to April 15) has a hidden cost approaching $1 trillion annually. This includes tax preparation; advisers, attorneys and lobbyists; IRS agents; plus the time spent by all parties involved.  Nearly 6 billion hours are invested in this activity each year.

There’s also a negative environmental impact from cutting down forests to print forms, instruction manuals, etc. Tax compliance actually impedes economic growth. We can use those 6 billion hours more productively to grow the economy. Our focus should shift towards making value-added goods and services at more competitive prices.

To summarize, lost revenue and the cost to comply with the current federal tax system probably exceed $2.5 trillion. This is a big problem!

Big problems have been tackled at other times in our history. At the dawn of the 20th century, when the NY Central Railroad was forced to convert  from steam locomotive to electric trains, the $70 million cost nearly matched their $80 million of annual revenues. Nevertheless, management figured out a way to lay new tracks underground, while the railroad continued to operate. Incidentally, this investment created a huge, unexpected economic boom. As it turned out, Park Avenue was built over the tracks, permitting air rights to be leased to developers.

Herculean problems call for out-of-the-box measures. Our solution to the current tax conundrum is streamlined and elegant.  Instead of focusing on income, we propose capturing two flows:  money saved and money spent.

Revenues can be generated from both.  We believe that savings should be assessed at a lower rate than consumption, since a dollar saved generates more jobs and income for society than a dollar spent.

Savings in the form of cash deposits, bonds and equities total nearly $67 trillion (and that doesn’t include the $2 trillion underground economy).  Instead of reporting dividends, interest and capital gains, financial institutions would report an average of the total financial assets on hand over the course of the year. We assume that most people will not stash their cash under their mattress, as they would forgo a return on their money (and because it’s not safe).

Americans consume $11.8 trillion annually in goods and services, as reported by the Bureau of Economic Analysis.  We believe the consumption of essential products and services – such as food, housing, healthcare and education – should be assessed at a lower rate than luxury items (e.g. the purchase of a loaf of bread would be assessed at a lower rate than a yacht).

Here’s one example of how our method might work. We would assess $11.8 trillion in consumption at an average rate of 13.5 percent (less for essentials; more for luxury items), generating $1.6 trillion. We’d also assess $69 trillion of savings at 2.75 percent, generating $1.9 trillion. Together, $3.5 trillion would balance the federal budget.

Our plan eliminates all federal taxes: income, social security, Medicare, capital gains, dividends, interest, inheritance, and corporate profits. Existing social programs will remain in place, including social security, Medicare, and welfare.

We believe our plan will have mass appeal.

The poorest will no longer pay 15 percent for social security and Medicare. Instead they’ll pay 2.75 percent on their savings and a small percentage on essential purchases.

The wealthy would no longer pay any of the above mentioned federal taxes. Expenditures on estate planning would be negligible. Wealth will be preserved, since the average annual return on investment will most likely exceed 2.75 percent.

The middle class would benefit from all of these proposals, including a shift from household spending on tax compliance to household spending on essentials.

Corporations will experience tax-free profits and lower costs of production, including tax-free labor and capital and severely reduced tax compliance expenditures.  As a result, there will be downward pressure on the price of goods and services offered to the masses.

On the government side, our strategy would virtually balance the budget and make Social Security more solvent.

Our simple method of assessment offers relatively low and stable rates.  This would allow us to focus on creating value-added products instead of  minimizing tax liability.

This environment will likely promote greater investment and net capital inflows, manifesting in greater employment, productivity, and economic growth. Liberals and conservatives alike believe my tax proposal is fair, effective and elegant in its simplicity.

The time has come to end federal taxation as we know it. _______________________________________________________

My wife Billie Elias provided valuable assistance with this piece.

An updated article of mine on this topic can be found here.


Boston Marathon Will Generate Long Term Economic Growth


Many people are focusing on the lost economic activity in the Boston area due to the tragic events over the past two weeks.  While the region has suffered in the short term, this incident may trigger extraordinary future economic growth.

The key driver of this growth will be the use of bionic limbs for amputees.  Dr. Hugh Herr, who heads the Biomechatronics research group at the MIT Media Lab, has been instrumental in developing bionic prostheses that provide extraordinary functionality.   As a double-amputee, Dr. Kerr can attest to the great strides in this area and how beneficial it can be to society.  He believes this technology will become extremely popular and useful in the future, especially given the recent incident at the Boston Marathon.

These bionic limbs are functioning more like our natural limbs and may actually surpass them in the future.  Dr. Herr receives periodic upgrades to his hardware and software, which enable him to continue his passion for rock climbing.  He anticipates the development of future limbs that will enable the user to feel their surroundings, such as sand on a beach versus water in a lake.  He is inspirational as someone who has transformed major liabilities into tremendous assets.  Several months ago, 60 Minutes featured a Department of Defense initiative called Revolutionary Prosthetics, in which artificial limbs are controlled by mere thought.

From an economic standpoint, the long term benefits heavily outweigh the short term expenditures, thereby providing a high return on investment for society.  These benefits include the reduction of secondary disabilities – such as joint arthritis and pain – less rehabilitative intervention, and a more productive, income generating population.  Greater income, lower healthcare costs and a better quality of life will enable a more healthful economic environment in the future.

Healthcare Mandate Without Choice and Competition is Not Wise

The Patient Protection and Affordable Care Act (a.k.a. Obamacare) was ruled constitutional by the US Supreme  Court yesterday, based on the ability of the Congress to levy taxes.

Prior to its passage, the president repeatedly claimed this legislation did not contain a tax on the American people.  However, in arguing before the US Supreme Court, the administration claimed the opposite.  That is, the statute is  constitutional because it is a tax.

Notwithstanding this divergent rationale, the legislative policy is severely flawed in its methodology, despite the merits of the individual mandate.

The mandate has merit, since everyone is highly susceptible to requiring medical care.  Uncertainties in life can befall all, leaving individuals to demand healthcare – involuntarily – as a result of accidents and/or genetic anomalies.  Hence, individual responsibility is in order.  That is, contribute while you can, so it’s available when you can’t.

However, the policy is deficient in terms of the lack of funding, competition and choice.   As a result, healthcare expenditures and federal deficits will likely grow at a more rapid pace.

Based on the funding mechanism, many individuals will chose not to participate in the system, since the cost of care is 10-30 times more expensive than incurring the penalty.  As people require care, less money will be in the system to cover the needed services.

More importantly, this legislation reduces competition among healthcare  insurance companies and limits consumer choice.  Optimal economies of scale are realized when firms are permitted access to the entire market and individuals can select the products that best suit their needs at the time.  This law does not permit healthcare insurance firms to compete nationally, and consumers are precluded from selecting a high deductible, catastrophic plan with low annual premiums in lieu of a low deductible, comprehensive plan with high annual premiums. The latter also violates the president’s oft repeated pledge that you will be able to retain your current healthcare plan if you so choose.

In addition, the current legislation lacks meaningful tort reform that would reduce frivolous law suits.  Placing greater responsibility on the plaintiff to file a bona fide law suit could reduce healthcare expenditures that result from defensive medicine and over-utilizing  scarce resources.

This legislation is likely to create more problems than it solves.  Barring substantial changes, repeal may be warranted.




Global GDP Over the Past 2000 Years

The graphic below depicts the percentage of global GDP for each country over the past 2000 years.
Note the massive declines for India and China.  
China’s decline correlates with the diminishing power of the dynasty system.  It ended in 1911 with the fall of the Qing Dynasty during the Xinhai Revolution.  It’s growth coincides with the economic liberalization that began in the late 1970’s.