Other People's Money

Sooner or Later ... - Glenn Reynolds

Sooner or later, you run out of other people’s money. Something that can’t go on forever, won’t. Debt that can’t be repaid, won’t be. Promises that can’t be kept, won’t be.

National Banking Troubles

Monster Prediction From BofA: Another US Debt Downgrade Is Coming In Just A Few Weeks - Joe Weisenthal

The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit-reduction plan. The committee is more divided than the overall Congress. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes

Eurozone summit - despair and backbiting in the corridors of power - Bruno Waterfield

Just when the eurozone governments thought it could not get worse for Europe's single currency, it did.

Shell-shocked EU finance ministers meeting in Brussels on Saturday were already reeling from the worst Franco-German rift for over 20 years and a fractious failure to resolve the problems that have brought Greece, and the euro, close to the brink.

But then a new bombshell hit as a joint report by the EU and the International Monetary Fund (IMF) warned that, without a default, the Greek debt crisis alone could swallow the eurozone's entire €440 billion bailout fund - leaving nothing to spare to help the affected banks of Italy, Spain or France.

An EU already rocked by divisions between France and Germany over how to increase the "firepower" of the European Financial Stability Facility (EFSF) in order to save the wider eurozone from Greek contagion now faced the prospect of losing it all in one go.

As dark-suited finance ministers contemplated the pains au chocolat laid out on their desks alongside their talking points and position papers, Jan Kees de Jager, the Dutch finance minister, told colleagues: "We've got to get real. People are talking about new defences but with one gulp the whole €440 billion could be gone, leaving the eurozone with no protection at all."

Charting Europe's Toxic Debt Jack In The Box - Redux - Tyler Durden

That Europe is, and for a long time has been nothing more than one spring club loaded, and destructive Jack in the Box, just waiting to be unleashed upon the world when the conditions are most dire, is by now nothing new to regular readers: it was roughly two years ago when we presented for the first time the case of how European bank debt is not only orders of magnitude greater than American debt, but that the equity tranches is a tiny sliver in a world where one bank's assets are another bank's liabilities, and any modest write down of debt would result in a cascading domino effect which wipes out billions and possibly trillions in "book value."

See the linked graphic.

The Economy - October 2011

This is just the beginning. Things are going to get worse before they get better. Americans need to follow some good old-fashioned advice:

• If you're in debt, pay off your debts.
• If you're out of debt, do not borrow.
• If you're having trouble making ends meet, reduce your overhead.
• If you're unemployed, acquire some marketable skills asap, or start your own business. Do not rest until you get some cash-flow.
  
• If you're earning money, set some aside for the future.
  
• If you're going to college, pay as you go. Under no circumstances enroll in a college you cannot afford. And while you're there, gain some knowledge that will get you started on a rewarding career.
• Have some self-respect: Do not depend on the government to take care of you, and don't mooch off of friends and relatives.
• Create wealth through your own productive labor (including mental labor). Labor is only productive if someone is willing to exchange cash or services for it, or it increases your personal capital.
• Don't vote for politicians who promise to give you something. They are con-artists and thieves.

A long, steep drop for Americans' standard of living - Ron Scherer

What has led to the most dramatic drop in the US standard of living since at least 1960? One factor is stagnant incomes: Real median income is down 9.8 percent since the start of the recession through this June, according to Sentier Research in Annapolis, Md., citing census bureau data. Another is falling net worth – think about the value of your home and, if you have one, your retirement portfolio. A third is rising consumer prices, with inflation eroding people's buying power by 3.25 percent since mid-2008.

Scary Budget Fact of the Day - Peter Suderman

The United States will officially pass the 100 percent debt-to-GDP line on Halloween. Via Zero Hedge:

October 31, elsewhere known as Halloween. Yes, ladies and gentlemen: All Hallows E'en will be doubly scary this year: for the first time since World War II, US debt will officially surpass GDP on Halloween 2011.

Student Loan Bubble To Exceed $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" And Another Taxpayer Bailout - Tyler Durden

USA Today reports once again on one of its favorite subjects, student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt. "The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards."

...

So... debtors know it's a bubble, lenders know it's a bubble, everyone knows it's a bubble, yet it is growing faster now than ever before.

Economic Production

How Government Spending Impoverished Us All - Tyler Durden

A tonne of copper can't be consumed until it is produced. But the government can spend money that it doesn't have. So government spending can't be part of what was produced by a country unless it has been covered by taxation--then at least the wealth was produced prior to consumption. If the spending is empowered by debt creation, then no production was involved.

It's like measuring the wealth of a family by counting the money they spend, with no regard as to whether they are piling up credit card debt.

More EU Crisis

Europe on the Brink - Megan McArdle

I haven't been blogging much about Europe because I felt like I was mostly repeating myself. Europe is not an optimal currency zone. It opted for monetary union without the fiscal or labor market integration that make America's sprawling currency zone work. So far, the various governments have failed to mount a really credible coordinated response. I don't see how the thing can hold together, except that Jesus, it will be hell if it all falls apart.

But it's probably worth interrupting your regularly scheduled unemployment-and-kitchen-blogging to point out that it all really seems to be coming to a head:

In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

2011 Power Line Prize

The winner:


2nd place, "Dear Uncle Sam":



One of the 3rd place prize videos:


Another 3rd place video:


An honorable mention:

Federal Debt Ceiling

Dear Congress, Your Credit Application Has Been Turned Down - A. Barton Hinkle

Thank you for your interest in the American Public Trust's Gold Card credit program. Rest assured your application has been given thorough and careful consideration by the American people.

After reviewing the information provided in your application as well as your credit report, we regret to say that we are unable to extend you further credit at this time. The reasons for our decision are as follows:

(1) Inadequate income.Our records indicate that your annual income for the 2011 taxable year was $2,170,000,000,000. You have requested a credit limit of $17,000,000,000,000. These figures exceed the American Public's debt-to-income guidelines for credit issuance.

(2) Excessive spending. The receipts you provided indicate your annual expenditures for the 2011 fiscal year total $3,820,000,000,000, or $1,650,000,000,000 more than your total income for the year. The American Public prefers that its members of Congress maintain a positive or neutral rather than a negative cash flow.

(3) High debt utilization. Your credit report indicates that you have a credit limit of $14,300,000,000,000, and of that amount you have utilized $14,300,000,000,000, for a debt utilization ratio of 100 percent. Consumer banking industry guidelines recommend a debt utilization ratio of no greater than 30 percent for standard creditworthiness, and 10 percent for exemplary creditworthiness. A debt utilization rate of 100 percent meets our classification of "You're *&^%$#@! kidding, right?"

...

You may also wish to contact a consumer credit counseling agency. The National Foundation for Credit Counseling can help you locate a reputable counseling agency in your area. You may also wish to visit the NFCC's website for helpful tips on such subjects as

• drawing up a budget
• living within your means
• saving during tough economic times
• steps to take when your finances get out of control

Government Spending

Inevitability of a Default in Greece - Floyd Norris

A Greek debt restructuring — a polite term for default — is unthinkable, according to the Greek finance minister.

“It would have a tremendous cost, with no benefit,” the minister, George Papaconstantinou, said in an interview on Greek television. “Greece would be out of markets for 10, 15 years.”

To financial markets, and to many other observers, it is more than thinkable. It is very close to a sure thing. When, how, and how messy it will be are open to question.

Thoughts on a Surreal Depression - Victor Davis Hanson

The combination of 2 billion Indians and Chinese in the world marketplace, exporting cheap goods, has meant fewer jobs for Americans and far more material playthings now accessible to every stratum of society. Again, easy credit, combined with little shame or penalty in defaulting on what one owes, has allowed a superficial parity with the upper-middle class. Massive government transfers and relaxed eligibility have ensured households thousands of dollars in entitlements and subsidies. We have printed $5 trillion since 2009, and borrowed $1.6 trillion just this year. And the huge influx of easy government cash shows here.

Cash wages have meant augmented entitlement money and are competitive with those who are formally employed and who pay 30% of their money in payroll, health care, and federal, state, and local income tax deductions. The result is an odd sort of poverty, in which superficially the unemployed and poor to the naked eyed are almost identical to the upper middle classes.

The CAP Act - Bob Corker

The only real way to place America back on a path to solvency is by imposing what amounts to a fiscal straitjacket. To that end, colleagues from both sides of the aisle and both houses of Congress have joined me in offering the CAP Act, legislation that, for the very first time, would establish an across-the-board, binding cap on all federal spending. A real cap on spending tied to a percentage of gross domestic product is a responsible way to impose fiscal discipline and achieve smaller government while incentivizing lawmakers to pass policies that promote economic growth. The CAP Act would result in $7.6 trillion less spending over ten years, fundamentally change the way Washington does business, and finally put America on a trajectory toward fiscal sanity.

National Debt

U.S. Treasury: China Has Decreased Its Holdings of U.S. Debt - Terence P. Jeffrey

Since September 2008, when they eclipsed Japan, entities in mainland China have been the largest foreign owners of U.S. government debt. But, as indicated by the Treasury Department chart linked here, Chinese ownership of U.S. Treasury securities peaked in October 2010 and has declined in each of the four most recent months reported by the Treasury Department.

At the end of October 2010, China owned 1.1753 trillion in U.S. Treasury securities. That dropped to $1.1641 trillion by the end of November, $1.1601 trillion by the end of December, $1.1547 trillion by the end of January, and $1.1541 trillion by the end of February 2011.

Quantitative Easing

Sarah Palin for the Fed? - New York Sun

The big question as Chairman Bernanke gets set for his first quarterly press conference is how Sarah Palin was able to figure out sooner than everyone else that the Federal Reserve’s campaign of quantitative easing wouldn’t work. Disappointment in the Fed’s policies is being reported this morning at the top of page one of the New York Times. It reports that “most Americans are not feeling the difference” from the Fed’s “experimental effort to spur a recovery by purchasing vast quantities of federal debt.” It reports that “a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.”

Plus, everything you need to know about QE2:



Via Liberal Compassion: Liberal Elite Tells Those Suffering From High Food Prices To Get "A Better Job"

National Debt

A Very Good Question about Our National Debt - Jim Manzi

A very smart commenter at the American Scene called “cw,” who almost always disagrees with me in a highly productive way, asked what I think is an excellent question:

So here is a technical question for Jim or whoever else can answer it: how much would taxes need to be raised to maintain our current entitlement regime?

The total present value of payments expected under Social Security and Medicare beyond what is expected to be collected under current tax laws is about $100 trillion. One way to put that amount of money in context is to note that it is about twice the amount of all the net private assets that exist in America today.

To answer cw’s question directly, the best back-of-envelope estimate is that meeting this unfunded portion of our Social Security and Medicare commitments would require roughly an immediate 80 percent increase in federal income taxes, sustained forever.

That is one end of a spectrum. The other is to cut out $100 trillion of present value of anticipated entitlement spending.

Obama's Budget Speech

Waste, Fraud and Abuse: Obama's speech was replete with all three - James Taranto

What's needed, he claimed, is "a serious plan" that will "require tough choices." He then outlined a four-step "approach"--it wasn't detailed enough to achieve planhood--that showed his promise of honesty to be an utter fraud.

The first step is "to keep annual domestic spending low." Wait, it's low? He then adds this qualification:

I will not sacrifice the core investments that we need to grow and create jobs. We will invest in medical research. We will invest in clean energy technology. We will invest in new roads and airports and broadband access. We will invest in education. We will invest in job training. We will do what we need to do to compete, and we will win the future.

So when he said of government spending that Americans "like the stuff that it buys," he was referring to himself. He seems less than determined to "keep" spending low, much less actually to reduce it considerably, which is what will be required.

President Boring - Roger Simon

What is it about Barack Obama that caused his vice president Joe Biden to fall asleep during the president’s speech Tuesday?

Did Biden, getting on in years, just need his afternoon nap? Well, maybe, but the television cameras showed a woman quite near the veep nodding out as well.

No, I think it was a natural response. Biden and the woman were bored stiff. Barack Obama has become the most tedious president in my lifetime. He is like those college professors whose classes you did everything you could to avoid but, if you had to go, sat as far back as possible in order to get a little shut-eye yourself.

But what is it about Obama that makes him so boring? I submit it is something quite simple — he has nothing to say. He is a boring person, the quintessential “hollow man” in the T.S. Eliot sense. He is kind of a socialist, kind of a liberal, kind of a multi-culturalist, kind of an environmentalist, kind of globalist, kind of a budget cutter — but none of them with any real commitment. Basically, he’s a vague and uncommitted person pretending to be otherwise. He is the man that voted “present,” now in the presidency. The fact that he never specified the targets of “hope” and “change” during his election was far from a campaign ploy and more typical than we ever dreamed. There never was a there there. And now, I strongly suspect, there never will be.

Obama, Spending Three Times as Fast as Bush, Blames Bush - Jim Geraghty

There is a lot of blaming Bush in this speech. Quick perspective: Using numbers from the U.S. Treasury, we see that the debt during Bush’s eight years in office increased from $5.7 trillion to $10.6 trillion, or $4.9 trillion over eight years. That’s bad; that’s basically $610 billion per year. But in the less than three years Obama has been in office, the debt has increased from $10.6 trillion to $14.2 trillion, a $3.6 trillion increase in about 27 months. In other words, Obama is increasing the debt by $1.6 trillion per year, three times as fast as Bush.

Also, follow the link for video of the McCain/Obama Presidential debate, where candidate Obama promises to cut more than he would spend, resulting in a net spending cut.


Krauthammer’s take on Obama’s budget address: ‘I thought it was a disgrace’ - Jeff Poor

“I’m going to give you one example of how dishonest it was – he went on and on how the Republicans want to steal from your grandma to lower taxes on the rich,” Krauthammer continued. “And he talked about the Bush tax cuts and how much he is going to stand on the bridge and oppose any extension which is what he knows how to do. He has done it over and over for the last six years. The Ryan plan is not about the Bush tax cuts. It transcends them. It’s what the deficit — what Obama’s own commission recommended, strip out loopholes and lower rates for everyone. It’s not about whether it’s the Bush rates or Clinton rates. It’s a whole new approach by which the Simpson-Bowles Commission recommended itself. In fact, Bowles had recommended in one of its scenarios of a high rate of 23 percent. Ryan is at 25 percent. Obama did this knowing that this is a way to play to his base. It was a speech that was quite remarkable in how demagogic it was and I say that with all due respect.”

With video.


About Those Medicare Savings - Kevin D. Williamson

Our current unfunded entitlement liabilities run about $100 trillion.

President Obama proposes to “strengthen” Medicare through a price-fixing panel called the Independent Payments Advisory Board (IPAB).

CBO took a look at IPAB and estimated that it might save us $28 billion over the next ten years, i.e., next to nothing.

And then it took another look and lowered its estimate from next to nothing to nothing:

For 2015 and subsequent years, the IPAB is obligated to make changes to the Medicare program that will reduce spending if the rate of growth in spending per beneficiary is projected to exceed a target rate of growth linked to the consumer price index and per capita changes in nominal gross domestic product. CBO’s projections of the rates of growth in spending per beneficiary in the March 2011 baseline are below the target rates of growth for fiscal years 2015 through 2021. As a result, CBO projects that, under current law, the IPAB mechanism will not affect Medicare spending during the 2011-2021 period.

You have to admire the president: To go out and give a morally preening speech like that, with IPAB front and center, on the assumption that nobody’s reading the footnotes.

Obama’s Tax Increase Trigger: Punishing Taxpayers with Automatic Tax Hikes When Politicians Overspend - Dan Mitchell

Called a “debt failsafe trigger,” Obama’s scheme would automatically raise taxes if politicians spend too much. According to the talking points distributed by the White House, the automatic tax increase would take effect “if, by 2014, the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.”

Let’s ponder what this means. If politicians in Washington spend too much and cause more red ink, which happens on a routine basis, Obama wants a provision that automatically would raise taxes on the American people.

Debt Gorilla

Video: There’s an 800-pound gorilla stalking the president! - PJ Tatler

Just follow the link. You'll be glad you did.

Federal Budget

Why Koch Industries Is Speaking Out - Charles G. Koch

Federal data indicate how urgently we need reform: The unfunded liabilities of Social Security, Medicare and Medicaid already exceed $106 trillion. That's well over $300,000 for every man, woman and child in America (and exceeds the combined value of every U.S. bank account, stock certificate, building and piece of personal or public property).

The Congressional Budget Office has warned that the interest on our federal debt is "poised to skyrocket." Even Federal Reserve Chairman Ben Bernanke is sounding alarms. Yet the White House insists that substantial spending cuts would hurt the economy and increase unemployment.

Plenty of compelling examples indicate just the opposite. When Canada recently reduced its federal spending to 11.3% of GDP from 17.5% eight years earlier, the economy rebounded and unemployment dropped. By comparison, our federal spending is 25% of GDP.

Uncloudy day on the budget front - Scott Johnson

Geithner freely conceded under questioning from Senator Sessions that the president's own budget calls for interest payments and obligations that are "excessively high" and "unsustainable."

Spending Cuts In Perspective - John Hinderaker




USA, Inc - John Hinderaker

If the United States were a company, what financial shape would it be in? And what would it make sense to do to put the company on a sounder footing?

...

First, the "bottom line:"

Slide 27:

As USA Inc. we have a continuing and enormous negative cashflow and negative net worth...effectively "in the hole" by negative $45 TRILLION!! [Ed.: So much for the insistent liberal theme that we're not broke.]

State Bankruptcy Debate

When States Go Bust - James Pethokoukis

It’s a solution of apparent Alexandrian elegance and simplicity: Empower America’s cash-strapped states to slice cleanly through a strangling knot of debilitating debt and government union cronyism by letting them file for bankruptcy. Long-term liabilities could be restructured, unaffordable labor contracts rewritten, fiscal health restored. No federal bailouts necessary.

This intriguing idea quickened last November when former House speaker Newt Gingrich gave it an animating shoutout during a speech at a Dallas think tank. That was followed by a detailed explanation in this magazine by David Skeel, a corporate law professor and bankruptcy expert at the University of Pennsylvania (“Give States a Way to Go Bankrupt,” November 29, 2010). As conservative Republicans on Capitol Hill began cooking up legislation to change the federal bankruptcy code, the concept exploded across the Internet—not to mention in Wall Street research departments.

Liberal bloggers, in particular, seemed to perceive the danger to a status quo where Big Labor elects state and local legislators who then return the favor by agreeing to contracts that, say, allow police officers to retire at age 50 with pensions equal to 90 percent of their highest salary. It’s a system that’s made government unions crazy powerful within the Democratic party while also helping states rack up some $3.5 trillion in unfunded pension and health care liabilities. (And that’s in addition to the anticipated $250 billion shortfall in state budgets over the next two years.) Kevin Drum of Mother Jones put it this way: State bankruptcy “promises to become a pretty serious battle. For Republicans it’s got everything: The tea parties will love it, it provides an alternative to raising taxes, and ... it helps defund a key Democratic interest group. What’s not to like?”

Surprisingly, quite a bit—at least among some Republicans and conservatives. In a January 24 session with reporters, House majority leader Eric Cantor brushed off the idea. “I don’t think [permitting states to declare bankruptcy] is necessary because state governments have at their disposal the requisite tools to address their fiscal ills.” The Virginia Republican added, “They have the ability to enter into new negotiations if there are any collective bargaining agreements in place. They have the ability to adjust levels of spending as well as revenues at the state level.”

A more pointed critique was offered by members of the highly respected free-market Manhattan Institute, Nicole Gelinas and E. J. McMahon, in the op-ed pages of the Wall Street Journal and other papers. Among their many objections to state bankruptcy: It would violate the constitutions of many states; it would damage the balance sheets of banks holding a quarter of a trillion dollars in state and municipal bonds; it might even cause such investor panic as to risk repeating the 2008 financial meltdown. “Bond-market brinkmanship and bankruptcy threats can’t save the states from themselves,” Gelinas wrote in the Boston Globe on January 23.

Obama to propose relief for states burdened by debt from unemployment benefits - Lori Montgomery and Brady Dennis

In recent years, states have been raising taxes, cutting services and firing workers in an effort to close record budget gaps opened by the recession. With the U.S. unemployment rate stuck at 9 percent or higher for nearly two years, 30 states - including California, Michigan and Nevada - have drained their unemployment insurance funds, forcing them to borrow to pay benefits to jobless workers.

The Economy - January 2011

Memphis Blues Again - Scott W. Johnson

Malpasss puts it this way (if I understand him correctly): "Since inflation is a deeply lagging data series - the Fed was able to claim throughout the 2003-2007 monetary bubble fiasco that inflation was 'moderating' even as the core PCE deflator, upon revision, was rising and always exceeded the Fed's 2% ceiling -- it's unlikely that inflation will ride to the rescue in time, nor does anyone other than commodity buyers really want that outcome."

Can this really be the end? Bob Dylan's lyrics run through my mind: "An' here I sit so patiently/Waiting to find out what price/You have to pay to get out of/Going through all these things twice."

UPDATE: Reader Carl Pham takes my concerns a step further:

if you've lived long enough, you'll notice the *order* in which inflation picks up is always the same, or at least it has been for the past 50 years or so: first gas and heating oil prices go up steeply (oil is priced in dollars, after all), then food (lots of transportation in its price), then durable goods and rents, and only last wages and real estate. . . .

I think the mistake many commenters make is assuming that these facts are not already well known to the policymakers, e.g., the Fed or the administration, or even older media talking heads, and that they need to have these facts pointed out to them.

I think that unlikely. I think they know exactly what they are doing, and they rely on muddling the connection between, say, rising gas and food prices on the one hand and what they are doing on the other.

In this particular case, I think both the administration and the Fed feel the inevitable pain is worth it for their goals, which are dominated by the urgent wish to get investors -- potential homebuyers, or potential employers -- to stop cautiously hoarding their cash and start forking it out, buying houses or employing people.

They have (probably correctly) deduced that Democratic re-election prospects in 2012-14 are tied to the unemployment rate and the price of houses, and they will do anything to move those numbers, regardless of future damage. (Besides, a roaring inflation later is just another crisis that cannot be allowed to go to waste! Wage and price controls are lovely avenues for centralized power.)

It's little different than FDR in 1934-35 observing that businesses were sitting on cash instead of hiring people (because of the insane regulatory environment, among other things), and determining to pry that cash out of them. In those days he took the blatant approach -- the undistributed profits tax of 1936. Nowadays a more subtle approach is called for: in this case, inflation, which is essentially a massive tax on savings and retained profits.

It probably doesn't hurt that in addition the one party that does well in a strongly inflationary environment is he who owes loads of money (the debt is rapidly eroded by inflation) and who has an income that is fully indexed to inflation, meaning it automatically rises in lockstep with nominal prices and wages. That of course describes state and federal governments today.

The Economy - December 2010

The Economic Incompetence Of The Political Class - Charles W. Kadlec

The sovereign debt crisis now threatening Europe, as well as major American states and cities, discloses the sheer incompetence of a political class that has over-promised, under-delivered and squandered vast amounts of their citizens' wealth.

Greece, Ireland, Spain, Portugal, California, Illinois, Los Angeles and Chicago are simply the poster children for what happens when elected officials engage in reckless and irresponsible management of their economies, their banking system or their respective government's public finances.

U.S. Debt Clock
As predicted, The U.S. unfunded liabilities per taxpayer exceeded $1,000,000 during 2010. As Glenn would say, another grim milestone.

This is a good opportunity to quote myself:

We are promising benefits which cannot be delivered while simultaneously burdening future generations with expenditures they cannot afford.

The next time someone asserts that 'We are such a wealthy nation, surely we can afford to fund [insert pet social program here]" feel free to say "Well, no. Actually we can't. The total debt per U.S. household already exceeds $680,000. In addition, if you include unfunded future obligations for things like Social Security and Medicare, that number exceeds $2,000,000 per family. Just who exactly is going to pay that? Nobody can and nobody will. It's a Ponzi scheme and must eventually collapse like a house of cards."

Government liabilities rose $2 trillion in FY 2010: Treasury - by David Lawder

The biggest increase in net liabilities in fiscal 2010 stemmed from a $1.477 trillion increase in federal debt repayment and interest obligations, largely to finance programs to stabilize the economy and pull it out of recession.

A remedy for beggar states - George F. Will

A study by Northwestern University's Kellogg School of Management calculates the combined underfunding of pensions in the all municipalities at $574 billion. States have an estimated $3.3 trillion in unfunded pension liabilities.

Nunes says that 10 states will exhaust their pension money by 2020, and all but eight states will by 2030.

States' troubles are becoming bigger. Hitherto, local governments have acquired infusions of funds from federal budget earmarks, which are now forbidden. Furthermore, states are suffering "ARRA hangover" - withdrawal from the American Recovery and Reinvestment Act, a.k.a. the 2009 stimulus. With about $150 billion for state and local governments, it raised the federal portion of state budgets from about a quarter to a third. Also, in 2009 and 2010, states and localities borrowed almost $200 billion through the ARRA's Build America Bonds program, under which Washington pays 35 percent of the interest costs. Republicans, in another victory over the president in negotiations on extending the Bush tax rates, extinguished that program, which they say primarily produced more public-sector employees.

States taxing themselves to death - Dick Morrix & Eileen McGann

High taxes kill states. There can be no better evidence than the 2010 Census. The states that lost House seats -- because they're shrinking, relative to the nation -- had taxes 27 percent higher than the ones that gained seats.

Of the seven states that don't have a personal income tax, four (Texas, Florida, Nevada and Washington) account for eight of the 12 seats apportioned to the fastest-growing states.

New York and Ohio lost two more seats. Other losers -- down one each -- are Massachusetts, Missouri, Michigan, New Jersey, Pennsylvania, Illinois, Louisiana and Iowa. What do they all have in common? High taxes.

Texas, with the second lowest taxes in the nation, gained four seats, Florida picked up two and Arizona, Georgia, Nevada, South Carolina, Utah, and Washington state each gained one. All have low taxes.

The states that lost seats ranked an average of 24th in taxes and had an average tax burden of $2,267 per capita (weighted more toward the states that lost more than one seat).

The states that gained seats ranked an average of 39th in taxes and had an average tax burden (weighted) of $1,788 -- 27 percent lower than the losing states.

People vote with their feet and flee to low-tax states. It's not the climate; it's the taxes.

The West and the Tyranny of Public Debt - Jacques Attali

The history of public debt is the very history of national power: how it has been won and how it has been lost. Dreams and impatience have always driven men in power to draw on the resources of others—be it slaves, the inhabitants of occupied lands, or their own children yet to be born—in order to carry out their schemes, to consolidate power, to grow their own fortunes. But never, outside periods of total war, has the debt of the world’s most powerful states grown so immense. Never has it so heavily threatened their political systems and standards of living. Public debt cannot keep growing without unleashing terrible catastrophes.

Anyone saying this today is accused of pessimism. The first signs of economic recovery, harbingers of a supposedly falling debt, are held up to contradict him. Yet we wouldn’t be the first to think ourselves uniquely able to escape the fate of other states felled by their debt, such as the Republic of Venice, Renaissance Genoa, or the Empire of Spain.

...

Still, accumulating excessive debt is far too easy. Spending naturally rises faster than revenue. But once the fatal spiral begins, how can a state escape disaster? There are only eight options: (1) higher taxes; (2) less spending; (3) more growth; (4) more lenient interest rates; (5) worse inflation; (6) war; (7) external aid; or (8) default. All eight options have been used in the past, but only one of them is both plausible and desirable today: growth. A growing economy (which raises tax revenue) permits the absorption of debt and restores sustainable public finances. Then borrowing can resume—if it will encourage further growth. Responsible governments do not finance their everyday expenses by borrowing, and they keep their investments at a level they can repay.

Catching On to the Entitlement Disaster - John Hinderaker

The picture with regard to Social Security is considerably bleaker, if you are a baby boomer:

The same hypothetical couple retiring in 2011 will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits. They will have paid about 10 percent more into the system than they're likely to get back.

A reader who is highly sophisticated in financial matters emails:

Another way of looking at it is that on the most conservative assumptions they are receiving no more than a NEGATIVE return of minus 1.9% on their "contributions"! LITERALLY....if they had buried the "contributions" in the backyard they would be better off!

The Economy - September 2010

NOTE: Thomas Straubhaar lives in Germany and wrote these columns for Der Spiegel.

America Has Become Too European - Thomas Straubhaar

A firm belief in the individual's ability, ideas, courage, will and a reliance on one's own resources brought the US to the top. The American dream promised everyone the chance of upward mobility -- literally from rags to riches, from minimum wage to millionaire. The individual's pursuit of happiness was seen as the crucial foundation for the well-being of society, rather than the benevolent state which cares for its subjects -- and certainly not the welfare state, which provides a social safety net for its citizens.

In the American system, every man was responsible for himself -- in good times and bad. No one could count on government assistance, not even the wannabe millionaire who did not make it and ended up homeless.

For many US citizens, the financial crisis has turned the American dream into a nightmare. Millions of Americans are struggling with high levels of debt, and not only because they bought overpriced houses during the housing boom and can no longer afford their mortgages. Often families are burdened with loans they took out during better times for cars, furniture, electronic gadgets or university tuition.

A Return to Traditional American Virtues - Thomas Straubhaar

Both the behavior of the American government and the Federal Reserve makes one thing clear: They do not see the solution to the US's economic woes in a return to traditional American virtues. Obama is not calling for the unleashing of market forces, as Ronald Reagan once did during an equally critical period in the early 1980s. On the contrary: Obama, driven by his own convictions and advised by economists who believe in government intervention, has taken a path that leads far away from those things that catapulted America to the top of the world in the past century.

The Obama administration's current policies rely on more government rather than personal responsibility and self-determination. They are administering to the patient more, not less, of exactly those things that led to the crisis.

Our Debt Is More Than All the Money in the World - Kevin D. Williamson

I have argued that the real national debt is about $130 trillion. Let’s say I’m being pessimistic. Forbes, in a 2008 article, came up with a lower number: $70 trillion. Let’s say the sunny optimists at Forbes got it right and I got it wrong.

For perspective: At the time that 2008 article was written, the entire supply of money in the world (“broad money,” i.e., global M3, meaning cash, consumer-account deposits, checkable accounts, CDs, long-term deposits, travelers’ checks, money-market funds, the whole enchilada) was estimated to be just under $60 trillion. Which is to say: The optimistic view is that our outstanding obligations amount to more than all of the money in the world.

Global GDP in 2008? Also about $60 trillion. Meaning that the optimistic view is that our federal obligations outpace the entire annual economic output of human civilization.

Interview With Marc Faber: It Is Not A Matter Of If With Hyperinflation, But When - Ron Hera

HRN: Do you think hyperinflation in the US is possible?

Dr. Marc Faber: The Federal Reserve doesn’t want to create a hyperinflation. I mean Mr. Bernanke may be incompetent, but he’s not an evil person per se. He just doesn’t have sufficient knowledge to be a central banker, in my opinion, and has misguided economic theories, but he’s not evil in the sense that he would not wish to debase the currency entirely. Clearly, if the US economy moves into a double dip recession and you have deflationary pressures reappearing, in the housing market, for example, and if the S&P drops from roughly 1,100 down to say 900, then I think further monetization will happen. I believe that because of the unfunded liabilities and the deficits of the US government, which will stay high for a long time; sooner or later there will be more monetization anyway.

It’s more a question of when it will happen rather than if it will happen. For sure it will happen but will it happen right away, say in September, or maybe only in two years time? Eventually, before everything collapses we’ll have an inflationary bout which may not be so strongly felt in consumer prices, as in stocks or housing or precious metals prices or in commodities like oil; or inflation could occur mostly in foreign currencies, in other words, in Asia where the currencies could appreciate.

Obama Stimulus Made Economic Crisis Worse, `Black Swan' Author Taleb Says - Frederic Tomesco

U.S. President Barack Obama and his administration weakened the country’s economy by seeking to foster growth instead of paying down the federal debt, said Nassim Nicholas Taleb, author of “The Black Swan.”

“Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.”

Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse.”