FedUpUSA

Archive for March 26th, 2010

On Politics, Vandalism And Violence

Posted by Karl Denninger

Peggy continues:

The beehive was already angry about a million things a year ago, and most of those things, obviously, were not the fault of the administration. People are angry at their economic vulnerability. They are angry at the deterioration of our culture, angry at our nation’s deteriorating position in the world, at our debts and deficits, our spending and taxing, our threatened security in a world of weapons of mass destruction.

Oh I disagree that most of this was not the fault of the administration, if you include all administrations, past and present.  Nearly all of these things in fact are government’s fault.  Let’s take a look at a few:

• Scams and frauds by “powerful people.”  Take your pick, and start with the list of banksters who are under indictment or in prison for the collapse.  You don’t even need the fingers on one hand for that thus far, never mind that in 2004 the FBI issued a formal warning on mortgage fraud and the Federal Government actually sued to prevent States from enforcing their own anti-predatory lending laws.
• Pay disparity.  And no, we’re not talking about “the rich get richer”; I’m talking about how government employees are literal queens and kings compared to the private sector, as the story from which this table was taken in the Wall Street Journal shows:
  
• Government policies that have encouraged the destruction of private-sector jobs in the United States.  We can start with policy toward China (sponsoring them for the WTO, for example) but it does not end there.  The fact of the matter is that “globalism” never benefits the guys who have the higher standard of living – it always causes that standard of living to fall while the less-developed nation’s standard of living rises.
• Illegal immigration.  Illegal Mexican Invaders were and are allowed over the border by our government and contributed greatly to the housing boom.  But those same people both depress American’s wages (since they’re off-book and thus are abused in general, paying no taxes and working under prevailing wage levels) and impose costs on our system that legal immigrants and citizens are forced to bear.  The cause of this?  Government policy.  To those who say we can’t deport 20 million invaders, you’re right – but we can imprison anyone who hires one, we can build a physical fence, and we can post our military at the border with orders to shoot all invaders.  Let them leave when their job prospects go to zero, and put a hard stop to any more coming into the country.  We refuse to do any of the above because “big business” likes the cheap labor, along with, literally, our Speaker Of The House who, it is alleged, employs them on their family’s farms in California!

   

• Debts and deficits?  Who originates spending bills again?  That would be The House of Representatives.  $1.3 trillion annually in deficits over George W. Bush’s “war spending” for the last two years is about 9% of GDP – and is absolutely the responsibility of the government.  Every dollar of “debt and deficit” is the direct and proximate consequence of one thing and one thing only: government policy.
• Taxation?  Health Care Bill anyone?  Nor does it end there.  Let’s cut the crap in this regard – we could end this problem tomorrow with The Fair Tax.  But that puts the IRS out of business, it puts the Lobbying Interests on “K” Street out of business, and it prevents using the tax code as a social engineering tool.  Neither political party likes that.  Oh, and it can be advanced and passed tomorrow – it is and has been introduced legislation!

I agree with Peggy that Washington needs to quit poking the beehive with sticks.

But where I disagree is that in fact virtually everything that has made the bees in the hive angry are the direct and proximate consequence of government decisions, and that those decisions were and are both willful and intentional. 

Finally, unlike Peggy who claims that the government “doesn’t understand” that they’re raising the temperature I instead maintain that they simply don’t give a damn, driven by the refusal of anyone in Washington DC to ever utter three little words that are the prerequisite to solving any problem one faces: “I screwed up.“

Health Care Passed; How will Individuals and Corporations React? Who will Opt Out?

President Obama managed to arm-twist Congress into passing an unpopular healthcare bill. Not a single Republican voted for it.

Supposedly the bill will guarantee coverage of 94% of the US population.

Many corporations complain it will increase costs. For example: Deere says health care law will raise expenses

Deere & Co. said Thursday that changes to the health care law signed into law this week will raise related costs this year by $150 million.

The biggest U.S. maker of farm equipment became the second major company in as many days to say it would take a charge for fiscal 2010.

Deere and Caterpillar were among the 10 companies that sent a letter to Congressional leaders in December warning of cost increases. Others were: Boeing Co., Con-Way Inc., Exelon Corp., Navistar Inc., Verizon, Xerox Corp., Public Service Enterprise Group Inc., and Met Life Inc.

The companies say federal subsidies have covered 28 percent of the cost of retiree prescription drug coverage. The government offered the subsidies so that more companies would continue to offer coverage to retirees and keep them off of government-funded Medicare Part D.

Under the health care reforms passed this week, that subsidy will be taxed starting next year, which the companies predicted could significantly increase government health care costs because companies may drop coverage.

“Taxing the subsidy means that more companies will eliminate or reduce the coverage, and more retirees will shift to Medicare Part D, which will create more cost for both the government and the retirees,” the companies wrote in their letter.

How Will Corporations React?

Inquiring minds are reading interesting anecdotes about Healthcare on Silicon Investor. A well respected poster Hawkmoon writes …

Mish,

Had a VERY INTERESTING conversation this evening with a CFO for a local business who employs about 100 people total..

I asked him how this health care bill was going to affect the company he works for.

He told me that he had run the numbers based upon providing health care for all of their employees and realized that he could save the company 1/2 million dollars by just paying the $2000 per employee penalty and not offering any coverage at all.

Is this how the government plans on taking over all health care?

If it’s more cost effective for business to just pay the penalty rather than provide coverage, I wonder how many are going to opt for that strategy?

Any other business owners out there have a different view?

Would be interested to know.

Hawk

Another poster, “John M” responds …

I ran the same simulation for the company I retired from. As a retiree, I continue to be in their group plan, at my own expense.

They can save $607,000 by terminating the health insurance plan, offset by a fine of $200,000. The company may get an extra push to eliminate health insurance courtesy of penalties on “Cadillac” plans. A rate increase of 4.7% would push it into Cadillac territory, which is defined by costs, not by benefits.

If cost savings were distributed to employees as raises, employees would presumably be able to purchase non-Cadillac plans with better benefits, and some potential savings. If there are minimum benefit schedules, then price would be the major consideration in buying health insurance.

“The Reaper” responds …

I don’t know about companies but individually. I’m just going to pay the fine each year (which is minimal) until I need health insurance (with some kind of illness/accident) then buy the insurance since I can’t be excluded. With any luck I’ll make it to Medicare and I’ll have saved a bundle of cash.

Looking Down The Road

Little Joe writes …

It is only after this bill is law for 5 or 10 years that we will begin to understand its effects. I believe they will be:

1. Costs far greater than anyone is the Government is letting us know. I challenge to name 3 government programs that cost what the government claimed they would. I can’t think of one, except, I think I read, the prescription drug bill.

2. Like Mass. the costs will increase greatly on an annual basis.

3. The quality of medicine will drop drastically. Can you name me a single government program of this size that actually improves anything. Feds got into schools and they got worse, Feds got into energy and the situation is worse.

This is the governments track record:

1. Social Security we can’t pay for.
2. Medicare we can’t pay for.
3. Prescription drug we can’t pay for.
4. Spend more money on education than any other nation in the world and many kids, especially in inner cities can’t read their diploma.
5. Criminal justice system that produces criminal injustice.
6. Can’t defend our borders, even banana republics can do that.
7. Country hopelessly in Debt.
8. Economy on the verge of destruction.
9. Encourages lending to people who can’t pay loans back.
10. Encouraged casino risk taking by removing moral hazard, which is the trigger that set of the current catastrophe and now further eliminates moral hazard by guaranteeing bank loans to one another.

Most Americans have apparently become aware of the ineptitude of government. Those who haven’t are the ones who think this health care bill will be a good thing for America.

For now ….

What will your company do and what will you do?

Large corporations will probably pony up. There would be an enormous backlash if they dropped benefits.

Smaller companies are another matter. I suspect many struggling companies will drop coverage if there is an economic benefit.

Looking at individuals, the annual penalty is $695 dollars or 2.5 percent of income. The penalty cap is $2,250 per family as of 2016.

Many of the young and healthy will simply opt out. After all, the bill will not allow discrimination based on preexisting conditions. Thus, it practically begs the young and healthy to opt out.

Moreover, if we can judge from “The Reaper” many healthy individuals approaching retirement will opt out as well.

Illegal aliens sure will not be buying coverage.

Finally, there are many who cannot afford, or believe they cannot afford anything at all. They too will opt out if the fine is lower.

94% coverage as a result of this bill? Don’t count on it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Consequences Of Health Care: Valuations

Posted by Karl Denninger

eah, I know, Obama has said that there would be no “material” impact to finances until 2014.

Liar.

Truth: Caterpillar and John Deere already announced non-cash charges of $100 and $150 million, respectively, for this year based upon the impact of this bill on forward retiree health care costs.

The law says you must account for such changes when you become aware of them, and that would be now.

But today a 100-kiloton device landed on AT&T’s (NYSE: T) balance sheet – they announced a one billion dollar non-cash charge:

On March 23, 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590).  Included among the major provisions of the law is a change in the tax treatment of the Medicare Part D subsidy.  AT&T Inc. (“AT&T”) intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change.  As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company.

Oh, there won’t be any material impacts until 2014 eh?

I told you that was BS, and now you’re seeing it. If you’re wondering how this stacks up, AT&T had revenue of $123 billion and a reported profit margin of 10.19%, for a net profit of $12.54 billion.

This represents about 8% – for this quarter.

Caterpillar (NYSE: CAT) reported $32.4 billion in revenue and a 2.76% profit margin, with a net income attributed to common of $895 million.  Their $100 million charge amounts to 11% of that income.

John Deere (NYSE: DE) reported $22.8 billion in revenue, a 4% profit margin and $912.80 million in net profit; their $150 million charge amounts to 16% of net income.

Still think this is no big deal eh?

I will note that “EPS”, or Earnings Per Share, is how we value stocks.  These valuation “hits”, if they are somewhat representative, imply that stocks instantly became overvalued by somewhere between 10-15% when President Obama’s pen hit the paper.

I hope (1) you have enjoyed the market rally and (2) have hedged yourself, as the efficient market hypothesis says that this new information will shortly appear directly in stock prices.

PS: The impact gets worse as current employee costs ratchet upward – these charges are only against retiree obligations for existing retired workers that remain as liabilities to the firm.  To expect that the total impact could easily reach 20% or more of net profits over the next couple of years is not at all farfetched, and the market should soon start discounting that too.

CBO REPORT: Debt Will Rise to 90% of GDP

By David M. Dickson

President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president’s budget would generate a combined $9.75 trillion in deficits over the next decade.

“An additional $1.2 trillion in debt dumped on [GDP] to our children makes a huge difference,” said Brian Riedl, a budget analyst at the conservative Heritage Foundation. “That represents an additional debt of $10,000 per household above and beyond the federal debt they are already carrying.”

The federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it’s headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO’s deficit estimates.

That figure would equal 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America’s debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year.

I will just note that this report does NOT include the unfunded liabilities of Social Security and Medicare, nor does it include Fannie Mae and Freddie Mac, nor apparently the FDIC’s new guarantee of the debt of failed banks.  If one were to add in these missing items, we are already far surpassing 100% of GDP.

Allegations Of OFFICIAL Corruption In Florida

Posted by Karl Denninger