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Volume XVIII Number 16 - October 25, 2019     RSS Feed   

A Periodic Newsletter for Committed Texas Conservatives

In This Issue

Houston Chronicle Endorses Turner While On Its Front Page Tells Us Why He Needs To Go

Vote NO On METRO Proposition

What Does The End Game Look Like? By Neland D. Nobel, Contributing Editor

TCR November 2019 Candidate Questionnaire

Red, White and Blue
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Hard Hitting
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Gary Polland
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Download TCR November 2019 Voters Guide PDF

Houston Chronicle Endorses Turner While On
Its Front Page Tells Us Why He Needs To Go

In the "You Can't Make This Up" department, the Houston Chronicle announces support for Sylvester Turner for Mayor while on its front page tells us "Rocky Roads Ahead - Years of Underfunded Maintenance Leave Houston Task of Improvement in a Deep Rut" - so if you review TCR's 2019 Houston Mayoral Edition, all the big deal problems, flooding, potholes, congestion, homelessness and corruption are up significantly under Mayor Turner. Thus, the case for voting him out is clearer than ever. The intellectually bankrupt editorial board ignores the facts and endorses him. We expected no less.

Fortunately, we have a real choice. Quite frankly, the choices are all better than what we have now.

If we fail to replace our failed Mayor, in the years to come we will all regret awarding another term to Mayor Turner.

Quite simply, are we better off today than we were four years ago on Houston's serious challenges? You know the answer, you live it every day.

Vote NO On METRO Proposition

Why? First, does it trouble you, the voter, that METRO (train and bus system) is spending over $8.5 million of your tax dollars to sell this plan to you? This is something that should be illegal.

Former METRO Chair Gilbert Garcia under Mayor Annise Parker penned a Houston Chronicle Op-Ed that you should read.

A few highlights: (1) With current rail and bus ridership numbers below forecasts, while the bus fleet ages and the Uptown Bus Rapid Transit costs explode exceeding hundreds of millions of dollars, why are we going into further debt? (2) The plan has no transparency and no priorities; (3) Rail to Hobby - after the failed express bus service to Bush and Hobby airports had a low number of passengers; you should ask yourself, why? Added to these concerns are the plan for grade level rail with frequent stops making it too slow to be used enough.

What Does The End Game Look Like?
Neland D. Nobel, Contributing Editor

I was visiting with a former client the other day, a knowledgeable man I have known since the mid-1970s.

He made his money mainly in real estate but has had an interest in, and positions in, precious metals through the various cycles over the past 45 years.

We were sharing impressions of some of the most recent trends. Among them was the quick FED pivot towards lower interest rates, even while the economy is doing well and stocks are at all-time highs. We marveled that government intervention, heretofore reserved for economic crisis, is now applied at the slightest hint of a slowdown. It is "stimulus" through cheap money all the time, for any reason.

We also agreed that neither political party has any intention of moving towards a balanced budget and eventually paying off the National Debt. The most recent agreement to avoid another debt ceiling crisis exemplifies the bi-partisan support for continued deficit spending.

Neither political party we agreed, had any idea or political will to deal with the entitlement crisis, which is as inevitable as is the aging demography of the country. We marveled at the recent Democratic debates, where candidates vied with each other to come up with new entitlement schemes to add to the already creaking financial structure. Free medical care not just for the elderly who paid into the system over a lifetime through Medicare, but free care to those citizens and even non-citizens who have paid very little or nothing at all. Plus add student loan forgiveness, new spending for a Green New Deal, slave reparations, and massive new infrastructure.

There seems no limitation at all on spending and the size of the deficit. The justify all this, both parties seem to be embracing tenants of Modern Monetary Theory, that suggests fiscal stimulus should replace monetary stimulus and that to fear deficits is about the same as fearing Sasquatch. Advocates suggest that if we can "bail out the big banks", we can just as well print money for a Green New Deal.

The nation can just keep borrowing and printing money, and so can the EU, the Japanese, and the Chinese.We are told, no harm will come for doing said.

We expressed shock at the widespread acceptance of the idea of open borders, where anyone, terrorists or teenager, can simply walk into the country, start demanding benefits, and even be allowed to vote in elections, thus cancelling out the votes of those of us who have spent decades paying taxes and even had the inconvenience of having to go to war to defend the country. Illegal aliens are put in front of citizens, all in the name of compassion.

We lamented the political division in the country, the ramping up of political rhetoric and even the appearance of political violence. We wondered whether the country could pull together to deal with an economic or military crisis.

We shook our heads as everything from late night comedy, sports, and even shoe selection is now politicized by some radical faction.

We shared concern about the Leftward tilt that seems to dominate university education and that is even migrating down into elementary and primary education.

It was a conversation that was sobering and a bit depressing. Then my friend asked an important, and very difficult question to answer. He said, "given these trends, what does the end game look like?"

My counter was, "the end game in what, the economy, the country?"

His counter was, "is there a real difference?"

I shrugged and said that this is a very important question and a very difficult question to answer. One could easily write a book, or even a series of books, on this question.

History is not linear. People respond to crisis and America has been blessed in the past that intelligent leaders have emerged when we have needed them. It is not a stretch to say that if you study American History, a divine hand has been involved in our success.

The American People also, for all our faults and divisions, have inherent common sense that exists in the bulk of the population. Our system of checks and balances, while corroded, still functions.

True, we have some very loud and radical minorities, but I have to think that the bulk of Americans still understand that freedom, capitalism, and honest money; are necessary to their prosperity and safety and will not allow the country to go down the road to serfdom, as Hayek so eloquently put it.

But on occasion, the common sense of the people has failed and political compromise has been elusive. The Civil War was is a prominent example. One simply cannot rule out either a failed outcome or at the least some form of a national crisis. Given our divisions and how far we have strayed from the design of the Founders, a national crisis might be necessary to rouse the "vital center" of the nation. In short, a crisis may be necessary development to find a solution to some of these issues. Such a crisis may be necessary to prove bad ideas don't work and to create the consensus and political will which is now so lacking in our political elites.

Since this is such a broad topic, I decided to narrow the question to the markets and the economy, although I fully recognized the economy cannot really be divided from the outcome for the nation as a whole. But if the question is not narrowed, it will result in a book length answer.

It is clear that we are in a policy regime of easy money. All markets are floating upward, which is a rather unusual thing to see. Some have dubbed this "everything in bubble."

We disagree with that. The precious metals are stirring to be sure, but they are a long way from previous highs and the public is still liquidating metals. There are no signs of mania in the precious metals. But we would agree that equities, bonds, real estate, art, and much else in the economy, is now acting bubbly.

Debt is growing much more rapidly than the economy. The quality of much of this debt is deteriorating and much of it now carries a yield insufficient for the credit risk being taken. In fact, over $13 Trillion on bonds now trade with negative yield, and in Europe, we recently saw junk bonds trade at a negative yield. This is insane.

Zero interest rates and Quantitative Easing helped keep the 2008 crisis from fatally metastasizing, but it failed to stimulate growth (Trump tax cuts and deregulations gave us a boost) but ironically elevated stocks and asset prices, leading to uncomfortably severe economic inequality within society, which helps breed the political radicalism we see today.

These low rates however, are creating a zeal for yield. The lack of return is driving investors to take greater and greater risk to get a return. On the opposite side of the coin, extremely low rates lower the cost of capital and encourage business to invest in ventures they might not otherwise pursue,

The supporters of Modern Monetary Theory, a economic view popular among Democrats, are correct that a government cannot go bankrupt with a currency that it can itself create. But while such a government might avoid technical default, it may well pay interest and principal in money for less valued than when originally borrowed by the government.

If you had bought a US 100-year treasury bond, a century ago, it would mature today with the dollar being worth about four cents on the one hundred cents you originally lent. The government defaulted on its agreement to pay you in gold. If they had kept the guarantee to pay you in gold, do the math. A $1,000 bond divided by gold at $20.67(the then statutory price) would be payment in 48.47 ounces of gold. With gold around $1420 as of this writing, that would be a final payment of almost $69,000 dollars. That does not include the one hundred years of interest.

But more to the point, private corporations that live in the world of Zero interest rates, are over indulging in debt, raising the likelihood of default, and do not have the ability to print money to pay their bills. Currently, almost 50% of outstanding corporate bonds have a"junk bond" rating. And private debt is about 4 times larger than even our astounding $23 Trillion in Federal Government debt. Corporate debt is nearing an all-time record of greater than 72% of GDP.

Likewise, state and local governments cannot print at will, nor can foreign borrowers who have borrowed in US dollars. What could trigger a debt crisis? Most likely it will be a recession where earnings and revenue fall, but the debt obligations stay the same or increase. Unless the business cycle has been outlawed, recessions are part of the natural rhythm of economies.

But bailouts will be provided. We are now habituated to them. The Federal Government will run to the aid of the states, in effect transferring their debts to the national debt, and the World Bank and IMF will pump and support emerging market implosion.

The private sector, outside of important financial institutions will be on their own, although we might see GM style bailouts of corporations important to national defense or really large employers that have strong unions that will apply pressure. But most companies, large and small, and households, will be on their own.

There is simply no way the government could either borrow or print the sums necessary to stop a private credit liquidation. Nor is there legal authority to do so.

Thus, a likely outcome is what James Dines once called "infression," or an inflationary depression. It will look like a depression in that a lot of sectors will crater because debt will be being liquidated, but government is so addicted to stimulus and intervention, that it will try to offset these trends with monetary creation, hence inflationary depression.

This monetary intervention will likely not be exclusively of the QE variety, since the last experiment showed much of money created remained bottled up in the banking system because the banks had problems with capital requirements, regulation, and trouble finding credit worthy borrowers. It was a real case of pushing on the string, to use banking parlance.

This time, we look for more direct injections. Direct fiscal stimulus (huge deficits) and the use of electronic payment systems, sort of like today's foods stamps, to get money directly into the hands of the public and make an end run around the constipated banking system.

Equities will decline because earnings will turn down and stock buybacks, the biggest source of demand, will dry up. Since corporations have been borrowing to buy back their own stocks, if they curtail borrowing, the buy backs will have to be reduced as well.

Equities are also vulnerable because zero interest rates have caused them to become overpriced. With rates so low, we have seen the TINA phenomenon, or There is No Alternative, and hence many who once relied on bonds have piled into the stock market to achieve returns in a low rate environment. Over $13 Trillion in bonds now trade with a yield below Zero.

In a recession induced credit crisis, interest rates will tend to rise on lower quality debt, and fall on the highest quality debt. The bond market will bifurcate.

Precious metals will do well because they are an, asset that can't default (the deflation play), but will also rise because governments around the world will be bailing out their respective economies with money and credit creation (monetary depreciation).

Thus a "barbell" strategy of being long gold and the mining shares, being light on equities in the middle, and adding the long duration government bond on the other side of the barbell (like a zero-coupon treasury bond) would be an interesting strategy. Such a strategy worked well between 9/11 and the 2008 crisis, until about 2013, when gold faded and stocks really gained traction.

To be sure, interest rates don't not the have the distance to decline as they did in a earlier era but if long rates fell from above 2% to below say 1% (or even negative as in Europe today), it still is a 50% or more change,and thus a profitable trade on long bonds that are leveraged to a decline in rates.

Gold, on the other side of the barbell, should do well because of its default free status and that it will respond to desperate attempts of government to resuscitate the economy and contain the deflationary effects of credit default.

Success of course depends on the country honoring the rule of law, allowing free markets to function, avoiding confiscatory taxation, and avoiding civil strife. Whatever mix of things happen however, the wealthier you are, the better your have invested, the more options you have to deal with developments. You cannot stop investing because you are uncertain about the future.

We have no idea of the timing. We could stumble on like this for several more years. Recession seems less likely with a Trump second term, but it can't be discounted altogether. His policies have been more pro-growth than his opponents but his trade policies risk a trade war, which could easily trigger recession. But the powder keg is excessive debt of poor quality and recession likely the fuse. Recessions historically are bi-partisan affairs.

A lot of poor-quality debt resides in corporate America, a huge slice quantity exists in China, in Europe, and a substantial amount among the emerging economies. It is likely the quick pivot among central banker towards lower interest rates was prompted by their concern about this excessive debt. Just a hint of a slowdown caused them to change policy. Such a policy can buy time, but unless growth rates get above the rate of debt accumulation, there is simply no way to service the debt and avoid default.

We also are not anywhere near in slowing down debt accumulation. It now takes $3 in debt to get a dollar of GDP growth. The so-called Keynesian multiplier has gone into reverse gear. With that formulation, how can you get economic growth ahead of debt growth?

We will not get the necessary growth if the world, especially the Unites States veers towards the socialist model. Socialism historically has been a failure to create wealth, at the macro level or even the micro level (the experiment among the Pilgrims in New England and the Israeli kibbutzim.) Socialism also has failed to generally maintain democracy and the rule of law.

I know of lot of you are saying, "but what about the European model." Is that not democratic socialism and when visiting Europe, it all seems to work fairly well. You think the European model as you know it could have evolved without the US paying for their defense? You think they could afford a welfare state and a proper defense?

And let us not forget that Cuba, Venezuela, Argentina, Nazi Germany, Soviet Russia, and Mao's China, were also socialist countries. Let us just say freedom, the rule of law, and economic success, generally have not been found in socialist systems that did not get subsidies from the US and were protected by the US military. Can we agree on that? Besides, Denmark is not as socialist as you think and neither is Sweden.

Thus, the upcoming election cycle will be key to this outcome, especially the outcome in the US.

We claim no expertise at handicapping elections, but our sense is the Democratic Party has veered so far Leftward, embracing anti-Semitism, extreme abortion laws, open borders, high taxes, a government takeover of major industries, and even the attack on the American lifestyle (environmental extremism), that likely Trump will get a noisy and raucous second term. The Democrats have succeeded in the impossible. They make Trump look reasonable and prudent.

A Trump reelection will buy time, but likely not change the ultimate outcome. Even a quick return to fiscal sanity has a problem. Such large constituencies now exist that feed on cheap credit, that any significant reduction in debt growth, or a rise in interest rates, would touch off massive debt liquidation. Like a drug addicted person, even a reduction in the amount of debt laden drugs taken will result in withdrawal symptoms.

In short, the massive pile of debt, both private and public, is there to deal with, regardless of party. One party wants to add massively to it, and the other party does not want to acknowledge the problems exists.

There are only four ways of dealing with debt. You can pay it down, you can refinance it, you can inflate it away, or you can default on it. The first option seems highly unlikely, the second we have already tried, leaving the third and fourth as the most likely outcome. Given the reflex to intervene is now so thoroughly imbedded in both the political and economic system, an attempt to inflate it away seems the most likely. To default on debt, would be so wrenching, that it likely would create massive social disorder and political upheaval. We doubt our political class would go that way, and with good reason.

Where does that leave us? Most likely, infression, or inflationary economic contraction.

In a short essay like this, we don't have room to discuss every possible outcome, and besides there are so many variables, it will be hard to write a script. But the debt is there, and it must be dealt with. It is growing and it will not go away. Without vibrant economic growth, you cannot produce the revenue to support the debt.

This is equally true of "entitlements" in the industrialized world, promises of state pensions and healthcare. With the number of elderly increasing by the day, and the number of younger people shrinking, these systems demand immense revenue that limit productivity necessary to support debt. And they are perverse in the sense that the larger the social safety net, the more people fall into it during recession, while at the same time revenue to support the payments falls as the economy produces less taxable earnings and income. Deficits will soar in the next recession.

Think on your own. Maybe you don't care for our logic. That is fine. How do you think entitlements and debt will be supported if we have a recession? What do you think the end game will look like and how would you invest your money?

It would seem regardless of nuance, that some sort of debt crisis, followed by a massive government response is likely. This would involve a battle between deflationary forces of debt contraction and default, with inflationary attempts by government to offset the negative economic and societal affects.

Clearly gold bullion seems to play an essential role in any series of outcomes along these lines. Gold can neither default nor can its value be inflated away, like all other investments denominated in paper money.

Bonds, specifically US Treasury bonds of long duration, also look like a good deflation play. Therefore, the role each plays in the portfolio should be expanded, and hence our barbell metaphor.

Neland D. Nobel is an Arizona based free market economist and a contributing editor for TCR.

TCR November 2019 Candidate Questionnaire

The following are the questions posed on the TCR Candidate Questionnaire along with the correct answers. Questions not answered by a candidate were graded as incorrect. Candidates who did not respond were given a grade of "F."

  1. Do you support ending all diversions from the "Rain Tax" infrastructure fee and pledge to use those funds specifically for infrastructure and flood control as intended?Yes

  2. Do you support adding a minimum of 1500 new police officers to the ranks of HPD?Yes

  3. Will you support implementation of "Proposition B" and give firefighters their raise that voters approved?Yes

  4. Have you ever filed for bankruptcy, either personally, or for a business for which you were a principal or executive?No

  5. Do you support a requirement that contractors hire vagrants and/or the homeless for work on city contracts?No

  6. Do you oppose homeless encampments on city or state rights of way?Yes

  7. Would you support privatizing city services, such as street repair, if it were determined that private contractors could deliver those services at a lower cost while maintaining or improving the quality of those services?Yes

  8. Do you believe that governent should be more aggressive in its use of eminent domain?No

  9. Do you support a requirement that the City not raise taxes without a supermajority of at least 60% of City Council?Yes

  10. Do you support ending the HFD "All Hazards Response" policy?Yes

  11. Do you support adopting a defined contribution pension plan for all new municipal employees, excluding police and fire fighters?Yes

  12. Do you support establishing an independent commission to identify ways for the City fo eliminate waste, fraud, abuse, incompetence and operating efficiencies?Yes

  13. Would you support a waiting period that would exclude a donor to any Houston mayoral or city council candidate from receiving a city contract, as either a primary contractor or subcontractor, for a period of two years from the date of the contribution?Yes

  14. Do you support the consolidation of City functions with Harris County where practical?Yes

  15. Do you support ending race and gender based affirmative action programs and replacing them with a need-based system?Yes

  16. Do you support the right of City Council members to add items to the City Council agenda if approved by a majority of members?Yes

  17. Do you support lifting the city revenue cap which limits the growth in city revenues to the combined rates of inflation and population growth?No

  18. Would you support the elimination or sunsetting of tax increment reinvestment zones (TIRZs) in areas that are not economically disadvantaged?Yes

  19. Do you support zero-based budgeting, which would require city departments to justify their budgets on an annual basis?Yes

  20. Would you support a budget amendment requiring that all revenues above projected levels be used to pay down city debt?Yes

  21. Do you support compliance with federal law and cooperation with federal law enforcement including ICE?Yes

  22. Do you support capping residential property tax appraisals at a maximum 5% increase per year?Yes

Download TCR November 2019 Candidate Questionnaire Results

TCR on the Air

Red, White, and Blue featuring TCR Editor Gary Polland on Fridays at 7:30 pm on Houston Public Media TV 8, replaying Saturday at 6:30 p.m. on Channel 8, Monday at 11:30 pm on Channel 8.2 and on the web at

Upcoming show:
10-25-19 - The Politics of Millennials includes interviews with Ben Proler (National Board Member, Maverick PAC) and Ray Shackelford (President, National Urban League Young Professionals).

About Your Editor

Gary Polland is a long-time conservative and Republican spokesman, fund-raiser, and leader who completed three terms as the Harris County Republican Chairman. During his three terms, Gary was described as the most successful county Chairman in America by Human Events - The National Conservative Weekly. He is in his twenty-second year of editing a newsletter dealing with key conservative and Republican issues. The last eighteen years he has edited Texas Conservative Review. As a public service for the last 16 years, Gary has published election guides for the GOP primary, general elections and city elections, all with the purpose of assisting conservative candidates. Gary is also in his 18th year of co-hosting Red, White and Blue on Houston Public Media TV 8 PBS Houston, longest running political talk show in Texas history. Gary serves on the Board of Directors of American Values, a national pro-family, pro-faith, conservative organization supporting the unity of the American people around the vision of our founding fathers and dedicated to reminding the public of the conservative principles fundamental to the survival of our nation. Gary is a practicing attorney and strategic consultant. He can be reached at (713) 621-6335.

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