Mick Mulvaney was a young businessman and budding politician 11 years ago when he became co-owner of a company that wanted to build a strip mall near a busy intersection in this upscale bedroom community outside Charlotte.
All that was needed was money.
The company cobbled together the financing — which included borrowing $1.4 million from a family firm owned by a prominent local businessman named Charles Fonville Sr., according to court records and interviews.
Eventually, the project fell apart. The mall never got built. And Mulvaney moved on, building a political career as a firebrand fiscal hawk and tea party pioneer in Congress who railed against out-of-control government deficits — eventually rising a few weeks ago to be President Trump’s acting chief of staff.
Fonville, however, said his company has not received the $2.5 million with interest that he said it is owed. In explaining the debt to a Senate committee during his 2017 confirmation hearing, Mulvaney cast it as a casualty of a bad real estate deal, saying the sum “will go unpaid.”
Today, their dispute is at the center of a legal battle playing out behind the scenes in South Carolina as Mulvaney guides Trump through a high-stakes budget showdown with congressional Democrats.
.. The fight threatens to tarnish Mulvaney’s image as fiscally responsible, just as he has reached the most influential position of his career.
Fonville’s company has filed a claim in a South Carolina court against two companies in which Mulvaney has an ownership stake, accusing them of
- “intent to deceive,”
- “fraudulent acts” and
- “breach of contract” to avoid repayment. ]
The heart of Fonville’s allegation: When a new Mulvaney-linked company was formed and sought to foreclose on the first company Mulvaney co-owned, it was a maneuver to avoid paying the debt owed to Fonville.
.. Mulvaney was not sued individually, but late last year — while he was running the Office of Management and Budget and carrying out his duties as acting director of the Consumer Financial Protection Bureau — he traveled to Charlotte to be deposed in the case, his attorney said.
.. “I can’t believe he treated me the way he did,” Fonville said during interviews about the case, including one last month as he visited the property that kicked off the dispute. “It is not a small piece of money. You are talking about a couple of million dollars.”
“I have tried to call him,” said Fonville, 83, who said he is a Republican who voted for Trump. “He never called me back. I had thought Mick was an ethical person.”
Mulvaney declined to comment. The White House referred questions to Mulvaney’s lawyer, John R. Buric, who said Mulvaney has done nothing wrong.
China is Losing the New Cold War
At first glance, it may not seem that China is really engaged in an arms race with the US. After all, China’s official defense budget for this year – at roughly $175 billion – amounts to just one-quarter of the $700 billion budget approved by the US Congress. But China’s actual military spending is estimated to be much higher than the official budget: according to the Stockholm International Peace Research Institute, China spent some $228 billion on its military last year, roughly 150% of the official figure of $151 billion.
In any case, the issue is not the amount of money China spends on guns per se, but rather the consistent rise in military expenditure, which implies that the country is prepared to engage in a long-term war of attrition with the US. Yet China’s economy is not equipped to generate sufficient resources to support the level of spending that victory on this front would require.
If China had a sustainable growth model underpinning a highly efficient economy, it might be able to afford a moderate arms race with the US. But it has neither.
On the macro level, China’s growth is likely to continue to decelerate, owing to
- rapid population aging,
- high debt levels,
- maturity mismatches, and the
- escalating trade war
that the US has initiated. All of this will drain the CPC’s limited resources. For example, as the old-age dependency ratio rises, so will health-care and pension costs.
Moreover, while the Chinese economy may be far more efficient than the Soviet economy was, it is nowhere near as efficient as that of the US. The main reason for this is the enduring clout of China’s state-owned enterprises (SOEs), which consume half of the country’s total bank credit, but contribute only 20% of value-added and employment.1
.. The problem for the CPC is that SOEs play a vital role in sustaining one-party rule, as they are used both to reward loyalists and to facilitate government intervention on behalf of official macroeconomic targets.
Dismantling these bloated and inefficient firms would thus amount to political suicide. Yet protecting them may merely delay the inevitable, because the longer they are allowed to suck scarce resources out of the economy, the more unaffordable an arms race with the US will become – and the greater the challenge to the CPC’s authority will become.
The second lesson that China’s leaders have failed to appreciate adequately is the need to avoid imperial overreach. About a decade ago, with massive trade surpluses bringing in a surfeit of hard currency, the Chinese government began to take on costly overseas commitments and subsidize deadbeat “allies.”
Exhibit A is the much-touted Belt and Road Initiative (BRI), a $1 trillion program focused on the debt-financed construction of infrastructure in developing countries. Despite early signs of trouble – which, together with the Soviet Union’s experience, should give the CPC pause – China seems to be determined to push ahead with the BRI, which the country’s leaders have established as a pillar of their new “grand strategy.”
An even more egregious example of imperial overreach is China’s generous aid to countries – from Cambodia to Venezuela to Russia – that offer little in return. According to AidData at the College of William and Mary, from 2000 to 2014, Cambodia, Cameroon, Côte d’Ivoire, Cuba, Ethiopia, and Zimbabwe together received $24.4 billion in Chinese grants or heavily subsidized loans. Over the same period, Angola, Laos, Pakistan, Russia, Turkmenistan, and Venezuela received $98.2 billion.1
Now, China has pledged to provide $62 billion in loans for the “China-Pakistan Economic Corridor.” That program will help Pakistan confront its looming balance-of-payments crisis; but it will also drain the Chinese government’s coffers at a time when trade protectionism threatens their replenishment.
Like the Soviet Union, China is paying through the nose for a few friends, gaining only limited benefits while becoming increasingly entrenched in an unsustainable arms race. The Sino-American Cold War has barely started, yet China is already on track to lose.
Taleb Says World Is More Fragile Today Than in 2007
High-end real estate will be the first to fall.
The Biggest Emerging Market Debt Problem Is in America
A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.
.. Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let’s call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts... In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of “conventional” high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily... These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences... Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume... As was the case during the heyday of mortgage-backed securities, there is great investor demand for this debt, reminiscent of the “capital inflow problem” or the “bonanza” phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown during good times (when bad loans are made). These are good times, as the US economy is at or near full employment... The record shows that capital-inflow surges often end badly. Any number of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with
- mounting debt levels,
- erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and
- falling equity prices.
All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.
.. A decade after the subprime bubble burst, a new one seems to be taking its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as “Financial ‘Whac-a-Mole.’
.. Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance(up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place.