FedUpUSA

Archive for May, 2010

“Two Scoop Special”: Double-Dip Recession Guaranteed

By Charles Hugh Smith

Whether you believe the U.S. economy ever exited recession or not, a further decline is already baked in by numerous macro factors.

A “double-dip recession” makes no sense to the 76 percent of Americans who believe that the US economy remains in recession. And indeed, I argued in Suppressing the Cognitive Dissonance of a Bogus Recovery that the “growth” touted by the mainstream media and the Central State propaganda machine is a mirage.

To the 24% of the populace who believes the U.S. exited recession in fine fettle, I offer a “Two Scoop Special”: a Double-Dip recession is guaranteed for the following reasons:1. The Eurozone is heading into deep recession, taking U.S. corporate profits with it. Three things are certain in the Eurozone: Austerity, higher taxes and more of each nation’s budget will be carved off to pay interest on their ballooning debt. All three mean less money in consumers’ pockets, and in local government pockets.

Please see Why the Eurozone Is Doomed for more on the Eurozone’s structural problems.

2. China’s unprecedented bubble in credit and real estate will implode, taking down China’s economy. Warning signs already abound: please see If China Stocks Lead U.S. Market, Look Out Below and China’s Towers and U.S. McMansions: When Things Fall Apart (Literally) for more.China’s imploding debt/real estate bubble will cut its already meager imports from the U.S. and dismantle the illusion of “growth” (note to economists: building 100,000 empty highrises is not “growth”) that has enabled the commodity countries such as Canada and Australia to inflate new property bubbles at home.

3. Once China goes down, so do the housing bubbles in Canada and Australia, and the Asian economies which depend on sales to China for their own growth.

As those nations’ tumble into a bottomless pit of bubble-popping recession, their taste for American goods and services will plummet as well. Good-bye, inflated Corporate-America profits.China’s bubble deflating will be felt in Japan and the Southeast Asian “Tiger” economies, all of which will see their exports to China crater. Since they are all merchantilist to the core, this drop in exports will push them into recession as well.The highly popular fantasy that “emerging economies” will continue growing at insane rates forever will drop heavily into the dustbin of history.If you have any doubt about this scenario, call up a chart of copper, which is generally considered a bellwether for commodities and the global economy. Copper has crashed.

4. Local government in the U.S. will have to shed tens of thousands of jobs. As Mish has repeatedly pointed out, public unions could avoid massive layoffs by slashing the pay of all public employees and trimming their pension plans and other (in comparison to private-sector workers) gold-plated benefits. But the public unions seem bent on turning back the clock to 2006: they are rejecting any meaningful cuts in pay or bennies, and they also want limited/zero job cuts.

That isn’t possible. Any politico so beholden to the State fiefdoms that he/she votes in taxes high enough to fund the public union fiefdoms will lose power this November. States with 20% unemployment cannot survive massive tax increases, on top of all the junk fees and hidden taxes which have already been imposed on a burdened public.

This realization is slowly going mainstream, for instance: The Bankrupting of America: We have a ruinous collaboration of elected officials and unionized public workers.

The loss of hundreds of thousands of jobs (and don’t forget those 1.5 million Census jobs are temporary) will deplete the amount of income and borrowing power needed to sustain “consumer spending.”

5. Bank reform will force layoffs and consolidation in the financial sector. It’s been a tough year for the banks; after all, U.S. commercial banks generated a record $22.6 billion in derivatives trading revenues in 2009–that’s commercial banks, not investment banks.

Aw, poor babies.Reforms will eventually shutter many trading desks and curtail various high-labor gaming within the financial sector, triggering another round of layoffs. More “jump, you f**kers” signs will appear on Wall Street.

6. Housing’s bogus government-induced “rally” will implode. Just scan patrick.net for dozens of stories outlining the implosion: mortgage applications are plummeting, building permits are plummeting, sales are plummeting, etc. The Federal government essentially nationalized the entire U.S. mortgage market to save housing, and now that the Fed has announced an end (or so they claim) to their $1.2 trillion buying spree of toxic mortgages, then the Mortgage Emperor is revealed to have no clothing. There is no private mortgage market in the U.S. anymore; there are only the rotting carcasses of Fannie Mae and Freddie Mac, still soaking up tens of billions of dollars in tax money to sop up soon-to-default mortgages.For an on-the-ground report from once-hot San Diego, check out the San Diego Housing Forecast: the values of pricey homes is still falling, and buyers are now scarce.

7. The massive Federal bailouts accomplished nothing but propping up a rotten status quo for a year. No new jobs were created; what was “saved” by squandering trillions of dollars? The counterparties to AIG’s bad derivatives bets; Goldman Sach’s ability to skim profits day after day, month after month, a housing market doomed to slide much further, destroying the trillions dumped in to prop it up, and and a handful of pork-barrel projects at the state and local levels.

Now the “stimulus” and bailouts are drying up, and we have nothing to show for it. The bloated status quo cannot maintain its payrolls without the trillions in Federal largesse, and so payrolls and spending will fall throughout the status quo.

8. The vaunted “recession-proof” sickcare industry will start shedding jobs as Medicare and other funding sources implode. Texas doctors opting out of Medicare at alarming rate:

“This new data shows the Medicare system is beginning to implode,” said Dr. Susan Bailey, president of the Texas Medical Association. “If Congress doesn’t fix Medicare soon, there’ll be more and more doctors dropping out and Congress’ promise to provide medical care to seniors will be broken.”

More than 300 doctors have dropped the program in the last two years, including 50 in the first three months of 2010, according to data compiled by the Houston Chronicle. Texas Medical Association officials, who conducted the 2008 survey, said the numbers far exceeded their assumptions.The largest number of doctors opting out comes from primary care, a field already short of practitioners nationally and especially in Texas. Psychiatrists also make up a large share of the pie, causing one Texas leader to say, “God forbid that a senior has dementia. 

Once again, this shouldn’t be news to oftwominds.com readers, as we addressed this trend back on April 10, 2010: The Politically Inconvenient Medical Realities of Opting Out. Simply put, there isn’t enough money in the known Universe to fund U.S. sickcare, and now the reality is bursting through the walls of denial and complacency. The “recession-proof” sickcare (a.k.a. healthcare) system will start shedding jobs, not adding them, as the money dries up–not just Federal money, but private insurance funding as well, as employers cut headcount and laid-off employees find they cannot afford COBRA coverage or sky-high private insurance rates.

For more on the general trends at work beneath the fast-spreading oil-slick of propaganda, please see Why the “Nascent Recovery” Won’t Last (April 27, 2010) and How We Get Ahead Now: Gaming the System (April 20, 2010).

The Next Bailout: $165B for Unions

By Erik Berte - FOXBusiness

A Democratic senator is introducing legislation for a bailout of troubled union pension funds.  If passed, the bill could put another $165 billion in liabilities on the shoulders of American taxpayers.

The bill, which would put the Pension Benefit Guarantee Corporation behind struggling pensions for union workers, is being introduced by Senator Bob Casey, (D-Pa.), who says it will save jobs and help people.

As FOX Business Network’s Gerri Willis reported Monday, these pensions are in bad shape; as of 2006, well before the market dropped and recession began, only 6% of these funds were doing well.

Although right now taxpayers could possibly be on the hook for $165 billion, the liability could essentially be unlimited because these pensions have to be paid out until the workers die.

It’s hard to say at the moment what the chances are that the bill will pass. A hearing is scheduled Thursday, which will give the public a sense of where political leaders sit on the topic, said Willis.

Just last week President Obama said there would be no more bailouts.

President Obama Asked To Fund Wiis For Schools

Posted by Karl Denninger

Has Alan Grayson Lost His Mind?

Posted by Karl Denninger

I generally like Alan so I was stunned to see this bit of pandering - although perhaps I shouldn’t be, given that it’s election season and every one of the critters in Congress is trying desperately to justify their salaries.

5 minutes of worthwhile video, but….. (you knew there would be a “but”, right?)

Yes, we could cut the separate funding for Afghanistan and Iraq.  Of course we would then have the troops here, which still results in them being paid salaries, right?

The cost of a war isn’t just fuel for planes, bombs to drop and bullets to shoot.  It is also salaries for our soldiers, salaries for the development of weapons, salaries for places like Eglin and other bases.  If the total spent goes down that support to the economy goes down too.

You won’t see me argue for greater federal spending in the general sense.  But I will argue that until and unless you deal with the energy situation and our 40 years of stupidity in that regard walking away from the sources of our nation’s energy isn’t exactly smart.

Worse, however, Alan Grayson wants to give 90% of the money he would “save” through this move to “the people”, thereby not actually withdrawing the deficit spending (which we should do), but instead shifting it.

$16 billion of “deficit reduction”, so he claims.  But he’s not mentioning the $1.6 trillion in deficit that we have.

Cutting $160 billion wouldn’t be all that bad of an idea – that would be 10% of the deficit, and might actually matter.  Indeed, it would be what I’d call “a good start.”

But 1%? 

That’s pissing into a hurricane.

Nice try at populism draped in a false cloak of “fiscal responsibility” Alan.

It’s unfortunate that “on the numbers” your bill displays an IQ smaller than your shoe size.

Kuttner Has Been Lobotomized

Posted by Karl Denninger

There are times that so-called “pundits” and “editors” display such idiocy that it just must be responded to.  This is one of those times.

Posted last eve when I was well beyond the time when I’d allow my blood pressure to get jacked was this nonsense:

Austerity has suddenly become the universally prescribed cure for the fallout from the financial collapse. If widely adopted, it will prove worse than the disease.

It’s called fiscal balance Robert.  We had the inflation.  Punishing, cruel, ridiculous inflation.  Yeah, I know, you don’t think it happened because it was “only” a doubling of gasoline and diesel prices in a five year span (well, actually, it was closer to a tripling, but who’s counting, right?)

Of course this very same inflation showed up in other things, like houses and stock prices.  This made people “feel rich”, but in fact they were not, because their wages did not accelerate at anywhere close to the same rate, nor could they. 

Why?

Because we have “global wage arbitrage”, which is a pundit’s cute term for slave labor in China and Vietnam, prohibiting the classical wage-price spiral that everyone who studies economics recognizes.

The nations of the European Union are being treated as the object lesson in the costs of profligacy. This is supposedly what happens when you provide decent social benefits to regular people. In fact, most of Europe had reasonably well-disciplined budgets until a made-on-Wall-Street economic crisis took down their economies.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery.

Like in the US, right?  Might I reprise one of my favorite charts?

See, we thought the same thing coming out of our recession in 2003.  We wanted to “provide decent social benefits to regular people”, including Medicare Part “D”, right?

What we did was embed a permanent $500 billion budgetary deficit and even though we had a so-called “recovery” in the economy we were never able to reduce deficit spending during that so-called “recovery.”

Europe did the same thing incidentally, and claimed “recovery” and “growth” when in fact what they (and we) had done is blow an asset bubble or three and claim that was “prosperity.”  It is not, because said bubble cannot attract additional participants and keep inflating without more and more debt being piled up by someone.

If you “own” a $500,000 house but have a $500,000 mortgage you in fact own nothing and have no prosperity.  You have the trappings of wealth but not the actualization of it.  If that valuation is not supported by underlying economic facts then when (not if) it collapses you find that you not only have nothing you have less than nothing as the vacuum cleaner is attached to your wallet, job, life and soul and sucks you into the black hole of debt on the other end.

With the exception of a few smaller nations, the large deficits in the OECD countries are not the result of fiscal profligacy, but of revenue losses caused by the downturn.

Nonsense.  The “revenue loss” occurred because actual private final demand driven by current income was insufficient to support the production that was taking place.  The balance was being supported by ever-larger amounts of debt being used to pull forward tomorrow’s demand into today.

But debt used to pull forward demand comes with interest cost, and once taken on is used up and done.  In order to keep doing so you must pull forward with ever-larger amounts of debt, and the interest expense inexorably rises as a function of compounding, even if you can manage to keep rates low.

Unfortunately the laws of mathematics do not allow for Mr. Kuttner’s utopia to play out the way he would like.  Exponential functions all look great when you start, and it is only when one recognizes the long-term impact of what you’re doing that the horror of the future comes into sharp relief.  If you fail to recognize this up front you get to live the horror, and once that time has passed there is simply no escape from it, no matter what you’d like to have happen.

In the US, we finally ended the Great Depression with massive wartime borrowing and public outlay. We ended the war with a debt-to-GDP ratio of more than 120 percent, more than double today’s ratio. In Britain, debt-to-GDP peaked at about 250 percent.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls.

WWII destroyed huge amounts of infrastructure which had to be rebuilt and also killed off millions of people – mostly young people who were competing for the available jobs prior to the war.

Anyone with a modicum of intelligence recognizes that when you have 20,000 people competing for 15,000 jobs the wage for that job will go down.  If you then kill off half the 20,000 people the wage will rise dramatically, since there are no longer a sufficient number of workers to fill the positions, and thus the offer wage must go up.

In addition all those dead young people prompted our nation (and others) to do what people will do when their lovers come home after a few years in a trench where they haven’t had communication with them: make lots of new mouths.  We call this “the baby boom” and it also contributed to a rising level of demand over time.

Today’s situation is different. The origin of all the debt is not a war but a financial collapse. The new round of financial panic is the result of still fearful markets, a still fragile banking system, and deficits caused mainly by reduced output, not overspending.

Idiocy.

The debt came first jackass!

If this doesn’t make clear that the financial collapse resulted from the excessive debt then you’re blind – or an idiot who is unfit to scrub toilets with a toothbrush, say much less be “a senior fellow” at Demos.

There are plenty of people who are simply wrong because they have examined the facts and reached incorrect conclusions, and then there are those who simply ignore the facts and spout bald LIES in an attempt to drive an agenda that will lead directly to ruin.

One wonders exactly what sort of actual agenda Kuttner has – and whether, perhaps, he’s angling for a position in the next Hitler’s cabinet.

Padded Pensions and What to do About Them

The New York Times article Padded Pensions Add to New York Fiscal Woes has been making the rounds. At least 20 people sent me the link. Let’s take a look at few snips, then a look at a followup Times article on addressing the problems.

In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

It’s what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring. “I don’t understand how the working guy that held up their end of the bargain became the problem,” he said.

According to pension data collected by The New York Times from the city and state, about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The data belie official reports that the average state pension is a modest $18,000, or $38,000 for retired police officers and firefighters. (The average is low, in part, because it includes people who worked in government only part time, or just a few years, as well as surviving spouses getting partial benefits.)

Some will receive the big pensions for decades. Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.

The Times article is 4 pages long so please give it a closer look.

Legal Theft

Undoubtedly Mr. Tassone is not as stupid as he sounds. He knows full well he gamed the system, but it was legal.

Tassone argues he held up his end of the bargain. Excuse me for asking what end is that? Public unions are legalized mobs. They coerce votes from corrupt politicians willing to buy there patronage.

There is no “public end” because there is no one working on the public’s behalf. Indeed the public in general has been crucified with never ending tax hikes to support union thugs who pack every school board in the country, and promise Armageddon if police or firefighters get laid off.

The public is fed up and rightfully so. But what to do about it.

Can States Fix Their Pension Problems?

Inquiring minds are reading a follow-up New York Times article Can States Fix Their Pension Problems?

The Times interviewed 9 people.

Alicia H. Munnell, Center for Retirement Research says. …The only real option is to wait for the market and the economy to recover.

Excuse me for asking but what if it doesn’t. What if the stock market is no higher 5 years from now, or 10? What happens to pension assumptions at 8.5% a year?

I have news for you Alicia, the stock market does not always go up. It can and has gone sideways for 20 years before and it is highly likely to do so again.

Alicia H. Munnell is a former member of the Council of Economic Advisers and professor of management sciences at Boston College’s Carroll School of Management and director of the college’s Center for Retirement Research.

She is also completely unfit to advise on economic matters. She should be fired for incompetence.

Teresa Ghilarducci, New School for Social Research says … “Most public employees have pensions plans most every worker wants and should have.”

Teresa Ghilarducci, director of economic policy analysis at the New School for Social Research, is the author of “When I’m 64: The Plot Against Pensions and the Plan to Save Them.”

If there is a plot against public defined benefit pension plans I am all in favor of it. In fact, I am against all public unions.

Ghilarducci has not yet figured out that public pension plans have essentially bankrupt most major cities in the country. We simply cannot afford the benefits offered by public pension plans.

Joshua D. Rauh, Kellogg School of Management says …

The federal government should cut a deal with states. They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years — if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities:

The state must close its defined benefit plans to new employees and agree not to start any new defined benefit plans for at least 30 years.

The state must include its new workers Social Security, and provide them with an adequate defined contribution plan, again for at least 30 years. To this end, the federal government should start a Thrift Savings Program for state workers and operate it alongside the existing Thrift Savings Program for federal workers.

The tax subsidies for these new Pension Security Bonds would work like Build America Bonds, with the federal government paying 35% of all coupon payments directly to the state. The cost of this subsidy will be in large part offset by the gains to the Social Security system of bringing in new state workers. On net, this plan would cost the federal government $75 billion today, and would prevent a trillion dollar crisis in less than a decade.

Joshua D. Rauh is an associate professor of finance at Kellogg School of Management, Northwestern University.

We don’t need a “Thrift Savings Program for state workers”. What the hell is so special about state workers? Why not a Thrift Program for farmers? or computer programmers? or landscapers?

No, we don’t need programs for them either.

While I applaud the idea of closing defined benefit plans, the rest Rauh’s proposal is silliness if not outright lunacy.

Cynthia B. Green, ex-Governmental Accounting Standards Board member says … “The only solution is to end the unaffordable defined-benefit pension plans for public employees once and for all.”

That was one of the most sensible comments in the who article. However, she blows it with “The total actuarial cost of these benefits must be funded annually and jurisdictions should be prohibited from ever again celebrating a pension holiday.”

I am sorry Cynthia, but that would be excruciating to taxpayers, especially if I am correct about where the stock market is headed. Something has to be done about projected costs for those currently in the system.

Steven Greenhut, author of Plunder! says …

California voters are going to have to take matters into their own hands, through the state’s clumsy initiative process.

Courts have ruled that current pension deals are vested benefits that cannot be reduced, but there’s no reason not to fix the problem going forward. No initiative has so far gotten the backing necessary, but that’s only a matter of time. When unions complain about their vilification in a coming battle, they and their political allies will only have themselves to blame for ignoring the words of progressive Democrats like Willie Brown and David Crane.

Plunder! is a great book. For my review, please see Book Review: Five Thumbs Up for Steve Greenhut’s Plunder!

Liam Dillon, voiceofsandiego.org says …

Overall, the city hasn’t made fundamental changes to its cost structure, nor has it tried to raise taxes. Instead, change has been incremental, including a heavy dose of one-time budget fixes.

The horizon remains bleak. As it stands, in 15 years the city’s annual pension bill will eclipse $500 million.

Where’s the “B” Word?

Even though a couple of the interviewees have a grip on the problem, I am disappointed in not seeing the “B” word once.

One potential solution is bankruptcy, tossing the mess in the courts and hoping for the best. LA, San Diego, Houston, and many other cities are walking dead. In time, bankruptcy may be the only way to escape these absurd pension plans.

Another possibility I have not seen discussed is to tax the hell out of pension benefits. Give everyone the benefits they have earned, just tax benefits exceeding some amount, say $100,000 at 90%. This would need to be done at the state level, and under my proposal it would apply to anyone collecting benefits in that state.

Moving out of state would not help as the pensioners get a check from the state. The state could return money back to the cities.

For cities that have the ability to levy taxes, it could also be done at the city level. Under my proposal, the tax would automatically be withheld from each check.

Of course, cities should immediately kill defined benefit plans for new employees. Cities should also privatize everything under the sun including police and fire departments.

Small cities are already cutting costs by using sheriffs associations, there is no reason larger cities could not do the same.

The ultimate goal is to eliminate public unions totally, not just public pension plans.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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