Remarks in Response to a Bond-Trader’s Case for Dramatically Reducing Federal Debt, in 63 Charts: Part 1

Jeff Gundlach is the CEO of Doubleline Capital, a Los Angeles-based investment firm. He was previously the star performer for another firm, the Trust Company of the West (TCW), where he managed the Total Return Bond Fund. He left TCW in a very public, law-suit spawning spectacle of mutual accusations of self-interested impropriety. Still, the rapid growth of Doubleline Capital demonstrates that the dubious press has not impacted investors’ faith in him. He has been called the “$70 Billion Man” by Forbes, the “King of Bonds” by Barrons, the “Bond Savant” by Businessweek and one of the “50 Most Influential” investment managers by Bloomberg. Crossing Wall Street has demonstrated a certain awe of him by titling a recent profile “The Mind of Jeffrey Gundlach.” And, indeed, Jeff Gundlach is a very smart guy. He graduated summa cum laude from Dartmouth with a double degree in mathematics and philosophy, and he completed much of the doctoral program in either applied or theoretical mathematics at Yale—it’s reported differently in the sources that I looked at, but in either case, it’s impressive.

To add a certain avant garde cachet to his persona, profiles of him usually mention prominently that he once was the drummer in a rock band initially called Radical Flats and then Thinking Out Loud. Likewise, his departure from TCW was followed quickly by their assertions that a large stash of pornography, sex toys, and drug paraphernalia were found in the offices that he had vacated. Very recently, he was in the broader news again because his mansion was broken into and, in addition to some undisclosed amount of cash, several expensive watches, expensive wines, paintings by such renowned artists as Jasper Johns and Piet Mondrian, and a Porsche Carrera 4S were stolen. Gundlach offered a seven-figure reward for the recovery of the paintings and the car, and the paintings were eventually recovered, but not the car.

Gundlach’s biography is the classic “rags to riches” American success story. According to the profile in Businessweek, he may not have come from poverty, but his family was clearly of somewhat modest means: “his father was a chemist for a company that made wax for bowling alleys and his mother was a housewife.” Although several people in his extended family were successful inventors—“his uncle Robert Gundlach invented the photocopier and his grandfather Emanuel Gundlach formulated a hair tonic popular in the 1950s called Wildroot Cream-Oil”—he has subsequently claimed that the pivotal event in his determined ambition to become a successful investment banker occurred while he was watching an episode of The Lifestyles of the Rich and Famous on a small black-and-white television set and noticed the painful juxtaposition of his own circumstances and the lifestyle being showcased on the television show.

All of this background information is a preliminary to an extended discussion of a much-publicized Powerpoint presentation that Gundlack recently made called “Something for Nothing.” Gundlach is very decidedly a “deficit hawk,” and his presentation essentially reiterates Mitt Romney’s “47 percent “ assertions, but with the help of a plethora of charts and graphs—63 of them to be exact. In this worldview, the dramatic increase in income inequality and the public policies that have exacerbated those trends are not the core of the problem, but they are, instead, only one of many symptoms of the problem of too much government spending. Nowhere in the 63 charts is there a chart showing how much of federal spending is directly or indirectly subsidizing U.S. corporations, with the indirect subsidies including safety-net spending for those in the very low-wage jobs provided for many of America’s most profitable corporations, starting with WalMart and other big-box retailers and McDonald’s and other fast-food restaurant chains, but also including the exponential expansion of the warehousing industry through which all sorts of corporations employ workers through “temp” agencies.

But here I would like to focus on some of the individual graphs in Gundlach’s presentation and point out how they represent an ideological bias, at least as much as they provide a “factual” representation of the issues.

Here is the first graph:

Gundlach Chart 01

The purpose of the graph is clearly to emphasize that the spending that the Far-Right has reflexively and repeatedly targeted in deficit-reduction efforts—PBS, NASA, and foreign aid—accounts for extremely minimal portions of federal budget. So the focus clearly needs to be on entitlement “reform,” which is a euphemism for cutting entitlement spending dramatically—because it is, after all, a huge yellow bubble, like a boil that desperately needs to be lanced.

Never mind that all workers have deductions from their paychecks to support those programs and that because of income caps for those deductions, “average” workers contribute a larger percentage of their incomes to these programs that even the moderately affluent.

What is interesting about this chart is that the big yellow bubble includes spending not just on Social Security, Medicare, and Medicaid but spending on all “other mandatory programs, plus their net interest.”

I wonder exactly how the “net interest” has been calculated.

And I wonder if any of the calculations take into account that the deficit spending, under Reagan and the two Bushes, was financed in part—was made to look less profligate–by tapping into the previously untouchable Social Security trust fund. When the projected deficits in entitlement programs are calculated, those calculations never include the surpluses that were spent on other “priorities” or any calculation of the compounded interest that those surpluses might have earned—over the decades when Baby Boomers were in their peak earning years.

What is also very conspicuously missing from the chart is Defense spending. Even though we now spend more on defense than the next 15-20 largest militaries combined, Defense spending is always sacrosanct—ostensibly because of the necessity to protect us from another Pearl Harbor and another 9-11 but also-equally, I think–because it is largely corporate spending. When cuts to the Defense budget occur, such as during the Sequester, there is immediate political and media attention to the effects on military personnel. But, as in most industries with largely low-wage employees, personnel costs actually constitute a very small portion of our total defense spending. What led to the very recent budget deal was the corporate pressure on Republican legislators to get rid of the automatic spending cuts for Defense which were impacting corporate profits across the major defense industries.

On Gundlach’s chart, the cost of the War on Terror is listed as $115.1 billion. I am not sure what that number refers to. On the books, Defense spending is seven or eight times that amount. Moreover, the war in Afghanistan and the costs of maintaining forces in the vicinity of Iraq have never been included in the Defense budget per se, and just the War in Afghanistan is costing about that much per year. The total costs of Homeland Security have been kept purposely ambiguous, but they have been estimated at a quarter to half a trillion dollars per year.

There is also a parallel in Defense spending to what is occurring in small-arms manufacturing. Fewer and fewer Americans are choosing to buy guns, but those Americans who do own guns are buying larger and larger numbers of guns. The NRA is complementing the marketing strategies of the firearms manufacturers in convincing hardcore gun-owners that they need to stockpile their weapons before the government somehow makes them unobtainable, as a prelude to confiscating them. (Which, of course, begs the question of why one would want to have an ever larger stash of weapons that might be seized, unless there is some general delusion that personal weaponry will be enough to hold off determined police and military forces. I am not suggesting that the government has any intentions of outlawing guns but, rather, trying to highlight the extremely paranoid illogic in stockpiling weapons in one’s home.) Our armaments industry has likewise become so large that we now produce about 75% of the arms sold worldwide. This is the one segment of manufacturing in which we are incontestably still number one in the world.

As a result, there is tremendous lobbying pressure not to make any cuts in Defense spending that will to any degree reduce the enormous “private sector” profits being generated by defense industries.

All of which brings me back to the big yellow bubble. The “other mandatory programs” are presumably all safety-net programs of one sort or another that simply ought not to exist because they create “dependency” and reduce “wealth.” But what is never addressed by the deficit hawks who are determined to ignore the policy choices that have greatly exacerbated income inequality is the fact that because three-quarters of our economic activity comes from domestic consumer spending, income inequality is a much bigger drag on our economy than entitlement or any other government spending.

I’d like to see some charts showing projections, based on current trends, of income inequality and its economic impact over the next 30 years. When the re-imposition of several percentage points of suspended social-security deductions is cited by WalMart as a reason for flat quarterly profits, it illustrates not the unsustainability of government spending but the unsustainability of continuing to suppress wages to increase profits.

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