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The Red Line

Sophistry Masquerading as News in Connecticut

The Merriam Webster dictionary defines sophistry or sophism as “an argument apparently correct in form but actually invalid.”

This definition describes perfectly a recent newspaper headline that ran in several Connecticut newspapers in mid-September reading “CT on pace for another multibillion-dollar budget surplus.”

The subtitle got specific: Early projections from Gov. Lamont put state nearly $2.3 billion in the black this fiscal year.”

Certainly, the headline implied the “multibillion-dollar budget surplus” was a marvelous new development.

It wasn’t and isn’t. The surplus was forecast in early May when the official state budget was enacted.

The newspapers knew, or should have known, this.

A genuine news focus would have been the suspect nature of that stale forecast, given the plunge in the stock market upon which the state relies so heavily for income tax revenue.

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The Silent Price You’ll Pay for Our Mounting National Debt

After an unexpectedly hawkish Federal Reserve raised interest rates by 75 basis points for the third consecutive time last week, all eyes were on markets and the economy. Few, however, paid attention to the effect persistent inflation and higher interest rates will have on Uncle Sam.

September 30, 2022

That’s surprising. Gross interest expense on the national debt hit $88 billion in August according to the Monthly Treasury Statement. That’s a stunning annualized rate of $1.06 trillion. Interest on the national debt is exploding and heading toward what economists refer to as a “doom loop”—the vicious cycle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing.

The August numbers barely reflect the impact of the Fed’s interest-rate hikes between March and July, much less last Wednesday’s increase and the additional 1.25% by year’s end implied by the Fed’s new guidance.

The Fed’s more-hawkish guidance calls for “higher rates for longer,” even if it brings on recession.

Not only are rising interest rates driving up federal interest expense dramatically; inflation is propelling growth in government spending on Social Security benefits, Medicare and other government healthcare programs.

Naturally, if we do slip—or plummet—into a serious recession, federal income tax revenue will erode. Even before recession, the last nine months of declining stock and bond markets virtually assure an almost complete collapse in capital-gains-tax revenue.

The national debt is working like a cancer sapping the nation’s long-term economic vitality.

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The State Labor Deal and the Resulting Retirement Wave

Ned Lamont would have voters believe that he has engineered a “Connecticut Comeback.” On his campaign website, he claims to have turned a $4 billion deficit into a $4 billion surplus.

Lamont has had nothing to do with the temporary improvement in the State’s condition. The transitory improvement is based upon billions and billions of one-time federal assistance that will run out in a matter of months and upon a gusher of individual income tax revenue derived from a stunning decade-long stock market rally that ended nine months ago.

Lamont did have one critical task. He had 100% control over the negotiation of the new state employee wage contract, the SEBAC deal. Over the next decade that deal will cost the state an estimated $6.4 billion.

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Not An Isolated Incident

Recently, an assistant school principal in Greenwich, Connecticut was caught on video avowing that he hires only progressive teachers. He explained that he won’t hire Catholics because they are too rigid, nor older teachers since they are too set in their ways, for him to be able to bend them to his mission of progressive teaching.

In Greenwich, he is probably an outlier. I live in Greenwich, and I have a second grader in the school system. He has had two great teachers and is just starting with a third of apparent great promise. Yet, most of the progressive education mischief occurs in higher grades, so I will reserve judgment.

The reality is that this is not a Greenwich issue. It is a national issue, more precisely a Beltway issue. The national teacher unions headquartered in Washington DC and the Biden Administration are very clearly pushing a left-wing agenda. The unions and Biden are doing everything possible to inject critical race theory (CRT) into the nation’s public schools, despite all their protestations to the contrary.

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Jobs Blues Are Returning to Connecticut

Connecticut’s jobs outlook looks ominous, despite the most recent, very positive report of 6,500 jobs gained in July coupled with a big decline in the unemployment rate from 4.0% to 3.7%.

The job gains are highly likely to reverse very soon. Today, ADP reported that national private sector job growth in August fell to half its level in July, presaging a significantly weaker national number for August to be reported this Friday by the U.S. Bureau of Labor Statistics (BLS)  and a poor August number for Connecticut in the next state-by-state report from BLS in mid-September.

Even before today, there were warning signs nationally and for Connecticut. Connecticut’s workforce shrank by 2,100 in July, the first monthly decline in 2022. Connecticut was not alone. The labor force shrank in twenty-three other states.

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College: Free is Free, Before or After; Yet, Nothing Is Free

Joe Biden, supposedly a moderate, has become Bernie Sanders without much realizing it. Bernie Sanders and progressive Democrats have long advocated free college. Yet, most Americans understand that there is no such thing as free college any more than there is free lunch. Someone always has to pay.

Biden has now proposed cancelling much of the cost of college after the fact.  What’s the difference between up-front free tuition and after-the-fact tuition cancellation, aka loan forgiveness? There is none, if you think about it.

Taxpayers will have to pay.

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Don’t Count Out Leora Levy

After her victory in yesterday’s Republican primary with Donald Trump’s last-minute endorsement, Leora Levy will surely make the case for a return to successful Trump policies.

She will have a strong hand. The contrast couldn’t be more dramatic between the prosperous years of the prior administration and today’s disasters – high inflation fueled by Biden’s massive and unnecessary $1.9 trillion sixth round of Covid assistance, an embarrassing cut-and-run surrender in Afghanistan, an ongoing huge wave of illegal immigration across the southern border, etc.

Her opponent, Dick Blumenthal, will be hard pressed to defend the indefensible. Moreover, he begins the race against Levy with polling approval below 50%, always a dangerously vulnerable position for an incumbent.

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Federal Reserve Has Accelerated and Escalated

The Federal Reserve Bank’s monetary policies of increasing interest rates and “quantitative tightening”—reducing its $8.9 trillion balance sheet—will increase the volume and cost of government borrowing at all levels. It will slam the federal budget and state budgets as well, especially states in chronically weak fiscal condition such as Connecticut, despite its recent improvement.

The impact will be felt even without a recession, but if the economy does contract, the federal government will have limited capacity to employ fiscal stimulus to spur a recovery or to provide aid to struggling states.

The Fed has increased short-term rates by 2.25% following its 0.75% rate increases yesterday and in June and smaller increases in March and May. According to the Fed’s own official guidance, it will increase rates further in 2022 to reach an all-in increase of at least 3% by year end.

As this additional 3% works its way into the refinancing of maturing Treasurys and Connecticut State bonds, federal and state interest costs will soar.

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Ned Lamont’s “Debt Diet” and CT Democrats’ Debt Delusions

What happened to Connecticut Governor Lamont’s “debt diet”... if there ever was one?

Lamont is running for reelection claiming credit for fiscal restraint.

Yet, since Ned Lamont took office, Connecticut’s long-term borrowing has increased from about $25 billion to $27 billion. Moreover, after issuing $1.2 billion of new bonds already this year (see below), the state is officially scheduled to issue another $1.3 billion of new bonds this fall. In addition, Lamont and crew have committed to issue $175 million of Community Investment Fund bonds as well.

What kind of diet is that?

Lamont’s claim of engineering a fiscal turnaround of the state couldn’t be further from the truth. That is not necessarily to say that he has mismanaged affairs, but rather to say that he has had virtually nothing to do with the factors which have improved the state’s standing…  improvement which will only be temporary.

Three factors have been at play. The federal government has showered the state with Covid assistance money; the roaring bull market in stocks and bonds through December 2021 has produced a gusher of tax revenue from the state’s large population of wealthy investors; and, finally, automatic fiscal restraints adopted in 2017 before Lamont took office have limited spending.

Lamont was simply lucky at being there as governor as the three trends coincided.

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Rising Interest Rates Will Crush the Federal Budget

The Federal Reserve’s policies of increasing interest rates and quantitative tightening—reducing its $8.9 trillion balance sheet—will increase the volume and cost of federal government borrowing, slamming the federal budget and exposing the consequences of decades of deficit spending.

The impact will be felt even without a recession, but if the economy does contract, the government will have limited capacity to spur a recovery with fiscal stimulus.

Since February 2020, publicly held U.S. Treasury debt has exploded, growing from about $17 trillion to $24 trillion. Almost half of the increase has wound up at the Fed, whose Treasury holdings have ballooned from $2.5 trillion in February 2020 to $5.8 trillion.

Quantitative tightening is a big initiative. In May the Fed announced plans to reduce its Treasury holdings by $330 billion by the end of the year, and by $720 billion annually thereafter until its balance sheet shrinks to a yet-to-be-determined size. The Fed can reduce its balance sheet, but that doesn’t mean the federal government can reduce its balance of outstanding debt.

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