That’s how to judge the reaction to the Gov. Bobby Jindal Administration’s completion of refinancing of debt tied to the massive tobacco settlement of 15 years ago. The state took money upfront from it for the majority of the value of the annuity in exchange for periodic payments to the lenders, backed by the annuity payments. At the beginning of the year, the Administration started the refinancing process to lower those payments to take advantage of very low interest rates.
When completed, the state saved about $83 million. But had the timing been just a bit better, with the sale having come perhaps a month earlier, it could have reaped another $59 million as rates went up in the interim. This has brought criticism from some predictable sources trying to use this as a tool for political gain, both using the same flawed argument.
Some came from state Treasurer John Kennedy, who never has been shy in offering opinions far removed from his duties because they correspond with those exercised by governor, a position he appears to covet in 2015. He criticized the move saying it was too hasty and alleged that it was a product of inferior budgeting practices that relied on too many in-the-breach strategies. The Baton Rouge Advocate’s editorialists picked up on the war drums and more or less said the same, asserting that the state turned to this tactic because it was forgoing revenue through higher taxation levels.
This fantasy was not surprising given the economic illiteracy regularly on display in the Advocate’s editorials. The state never has had a revenue problem, but often a spending problem. It continues to have among the highest per capita expenses for state government, although under Jindal that slowly has been coming down yet, as a recent report revealed, spending inefficiently even on genuine and basic tasks of governments such as roads shows the pervasiveness of that wastefulness. Its state taxes per capita are not much below the national average. Chronic need to close deficits most recently was caused by the federal government’s stripping the state of its favorable reimbursement rate for Medicaid, and it has been health care spending rising at an alarming rate that has been the real cause of these as by far the state’s biggest expenditure of its own money comes in this area.
That Kennedy trots out this same discredited line does him no credit, but it also doesn’t address the merits of the refinancing issue. Maximizing state savings is the issue, regardless of any budgetary motivation present. And Kennedy’s maintaining that the state should have waited should make one think twice, when he leaves public office, about hiring him to be your personal financial adviser.
Basic economic knowledge, verified by research, tells us that policies of Pres. Barack Obama supported by Democrats when they had congressional power are going to cause potentially severe economic problems in the future. Already they have caused a jobless, if not phantom, economic recovery, but the next sign of trouble will come when interest rates begin a relentless rise. This will happen because of the huge debt level Obama has foisted on the country by massively higher spending, aided by congressional Democrats who have refused to perform the legal duty of passing a budget (by blocking attempts by Republicans to do so), that got put into motion when Democrats did have brief control of Congress that has locked in higher spending levels.
As debt piles up, to have buyers accept it in a no-to-low-growth economy interest rates must go up. This is because too much money is created, at a faster rate than the economy grows. A tactic to stave this off is to promote artificially lower rates through monetary policy by the Federal Reserve. But the longer the economy sputters without a robust recovery in growth and number of jobs available, the greater the chance of inevitable inflation and the longer it will last.
Rates also can get depressed because of the lack of growth, but as long as debt continues to grow faster than the economy, the tipping point will come, and the longer and lower rates were held down, the more vicious and lengthy the reaction will be when tipped. That in the past year rates have been their lowest ever – they hit their bottom last July and approached that again this April – and that mathematically unless the world economy went into a severe depression they can’t go much lower shows rates really only have one place to go, up.
And they have started to creep up over the past quarter (now at two-year highs), thereby reducing the utility of the Jindal strategy, over the thought that in spite of Obama policies growth might be getting above anemic, signaling for a change in monetary policy away from cheap money. This will bring the day of reckoning closer, although reducing its severity and length, of high inflation. This translates into higher interest rates, of course, although probably not as high or for so long in contrast to continuing the cheap money strategy.
So even if the deal wasn’t as good as it could have been in April, it’s good right now. Wise investors know one thing – you can’t time the market well, much less to perfection. Rather than take Kennedy’s advice and hold out for better, the optimal strategy (especially because putting together this kind of deal takes so much time) was to strike when the iron was hot. Rates are rising, and every bit of economic knowledge tells us if any dips occur they will be short-lived. It’s better to have the bird in the hand that to take on Kennedy’s conceit that a market can be timed and hold out for two in the bush.
Contrary to his braggadocio, Kennedy simply was wrong on this. Interestingly, he’s also inconsistent on this issue, having raised no such objections about projects like this in the past when it seemed his political ambitions were different. He should know better, in contrast to the Advocate’s ignorance. Fortunately, the Jindal Administration did, and a good decision now may turn out to be a great one as the country continues to fight off the burden of the economic consequences of the Obama presidency.
by Jeffrey Sadow
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