FedUpUSA

Archive for January 18th, 2011

Over the past couple of years, most Americans have shown little concern as austerity measures were imposed on financially troubled nations across Europe.  Even as austerity riots erupted in nations such as Greece and Spain, most Americans were still convinced that nothing like that could ever happen here.  Well, guess what?  Austerity has arrived in America.  At this point, it is not a formal, mandated austerity like we have seen in Europe, but the results are just the same.  Taxes are going up, services are being slashed dramatically, thousands of state and city employees are being laid off, and politicians seem to be endlessly talking about ways to make even deeper budget cuts.  Unfortunately, even with the incredibly severe budget cuts that we have seen already, many state and local governments across the United States are still facing a sea of red ink as far as the eye can see.

Most Americans tend to think of “government debt” as only a problem of the federal government.  But that is simply not accurate.  The truth is that there are thousands of “government debt problems” from coast to coast.  Today, state and local government debt has reached at an all-time high of 22 percent of U.S. GDP.  It is a crisis of catastrophic proportions that is not going away any time soon.

A recent article in the New York Times did a good job of summarizing the financial pain that many state governments are feeling right now.  Unfortunately, as bad as the budget shortfalls are for this year, they are projected to be even worse in 2012….

While state revenues — shrunken as a result of the recession — are finally starting to improve somewhat, federal stimulus money that had propped up state budgets is vanishing and costs are rising, all of which has left state leaders bracing for what is next. For now, states have budget gaps of $26 billion, by some estimates, and foresee shortfalls of at least $82 billion as they look to next year’s budgets.

So what is the solution? Well, for state and local politicians from coast to coast, the answer to these financial problems is to impose austerity measures.  Of course they never, ever use the term “austerity measures”, but that is exactly what they are.

The following are 22 signs that austerity has already arrived in America and that it is going to be very, very painful….

#1 The financial manager of the Detroit Public Schools, Robert Bobb, has submitted a proposal to close half of all the schools in the city.  His plan envisions class sizes of up to 62 students in the remaining schools.

#2 Detroit Mayor Dave Bing wants to cut off 20 percent of the entire city from police and trash services in order to save money.

#3 Things are so tight in California that Governor Jerry Brown is requiring approximately 48,000 state workers to turn in their government-paid cell phones by June 1st.

#4 New York Governor Andrew Cuomo is proposing to completely eliminate 20 percent of state agencies.

#5 New York City Mayor Michael Bloomberg has closed 20 fire departments at night and is proposing layoffs in every single city agency.

#6 In the state of Illinois, lawmakers recently pushed through a 66 percent increase in the personal income tax rate.

#7 The town of Prichard, Alabama came up with a unique way to battle their budget woes recently.  They simply stopped sending out pension checks to retired workers.  Of course this is a violation of state law, but town officials insist that they just do not have the money.

#8 New Jersey Governor Chris Christie recently purposely skipped a scheduled 3.1 billion dollar payment to that state’s pension system.

#9 The state of New Jersey is in such bad shape that they still are facing a $10 billion budget deficit for this year even after cutting a billion dollars from the education budget and laying off thousands of teachers.

#10 Due to a very serious budget shortfall, the city of Newark, New Jersey recently made very significant cuts to the police force.  Subsequently, there has been a very substantial spike in the crime rate.

#11 The city of Camden, New Jersey is “the second most dangerous city in America”, but because of a huge budget shortfall they recently felt forced to lay off half of the city police force.

#12 Philadelphia, Baltimore and Sacramento have all instituted “rolling brownouts” during which various city fire stations are shut down on a rotating basis.

#13 In Georgia, the county of Clayton recently eliminated its entire public bus system in order to save 8 million dollars.

#14 Oakland, California Police Chief Anthony Batts has announced that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer.  The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.

#15 In Connecticut, the governor is asking state legislators to approve the biggest tax increase that the state has seen in two decades.

#16 All across the United States, conditions at many state parks, recreation areas and historic sites are deplorable at best.  Some states have backlogs of repair projects that are now over a billion dollars long.  The following is a quote from a recent MSNBC article about these project backlogs….

More than a dozen states estimate that their backlogs are at least $100 million. Massachusetts and New York’s are at least $1 billion. Hawaii officials called park conditions “deplorable” in a December report asking for $50 million per year for five years to tackle a $240 million backlog that covers parks, trails and harbors.

#17 The state of Arizona recently announced that it has decided to stop paying for many types of organ transplants for people enrolled in its Medicaid program.

#18 Not only that, but Arizona is do desperate for money that they have even sold off the state capitol building, the state supreme court building and the legislative chambers.

#19 All over the nation, asphalt roads are actually being ground up and are being replaced with gravel because it is cheaper to maintain.  The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.

#20 The state of Illinois is such a financial disaster zone that it is hard to even describe.  According to 60 Minutes,  the state of Illinois is six months behind on their bill payments.  60 Minutes correspondent Steve Croft asked Illinois state Comptroller Dan Hynes how many people and organizations are waiting to be paid by the state, and this is how Hynes responded….

“It’s fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state.”

#21 The city of Chicago is in such dire straits financially that officials there are actually toying with the idea of setting up a city-owned casino as a way to raise cash.

#22 Michigan Governor Rick Snyder is desperately looking for ways to cut the budget and he says that “hundreds of jurisdictions” in his state could go bankrupt over the next few years.

But everything that you have just read is only the beginning.  Budget shortfalls for our state and local governments are projected to be much worse in the years ahead.

So what is the answer?  Well, our state and local governments are going to have to spend less money.  That means that we are likely to see even more savage budget cutting.

In addition, our state and local politicians are going to feel intense pressure to find ways to “raise revenue”.  In fact, we are already starting to see this happen.

According to the National Association of State Budget Officers, over the past couple of years a total of 36 out of the 50 U.S. states have raised taxes or fees of some sort.

So hold on to your wallets, because the politicians are going to be coming after them.

We are entering a time of extreme financial stress in America.  The federal government is broke.  Most of our state and local governments are broke.  Record numbers of Americans are going bankrupt.  Record numbers of Americans are being kicked out of their homes.  Record numbers of Americans are now living in poverty.

The debt-fueled prosperity of the last several decades came at a cost.  We literally mortgaged the future.  Now nothing will ever be the same again.

The Economic Collapse

A Chase official tells NBC News that 4,000 U.S. service members may have been illegally overcharged on their mortgages and that as many as 14 military families were wrongly foreclosed on. NBC’s Lisa Myers reports.

Visit msnbc.com for breaking news, world news, and news about the economy

If you’re wondering what happens if The Fed abandons QE2, the following should put it in stark relief:

Monthly net TIC flows were $39.0 billion. Of this, net foreign private flows were $79.8 billion, and net foreign official flows were negative $40.8 billion.

Yuck.

Here’s the problem – this entire ramp job [in the stock market] is nothing other than monetization [buying back our own debt].  And while this feels “real good”, the question is always sustainability.

Anyone who believes that The Fed will be able to continue to monetize forever, and that prices will thus rise forever, and will not decline back to their actual risk-adjusted return and price once that buying stops, either by choice or force….. well….. you’re rather deluded.

Foreign governments have got it figured out, and they’re slowly slinking through the door, hoping you don’t notice.

Who’s the sucker again?

Parallels between America’s current economic crisis and the 1930′s Great Depression are instructive.  Then, as now, hardship was preceded by a major banking upheaval.  Then, as now, a regulatory blizzard followed.  Then, as now, millions were displaced.  And then, as now, the cause of the Great Depression was widely misunderstood.  Many believe today that the 1929 stock market crash caused the Great Depression all by itself, that it was so severe it mysteriously destroyed wealth for another 13 years.  To put that in perspective, the serious Carter-era recession should have, by this logic, precluded the Reagan recovery in 1982 and perhaps wreaked havoc until 1990.  Not only is this argument absurd, it manifestly did not happen.

 In Franklin Delano Roosevelt’s 1933 inaugural address he lectured that “[t]he only thing we have to fear is fear itself,” suggesting Americans suffered irrational neuroses.  This is not at all true.  Americans made entirely rational and prudent business decisions amidst considerable uncertainty.  Though FDR is invariably cast as heroically facing down near-insurmountable economic travails, the less-flattering diagnosis is much more obviously true: he caused them.

 With the New Deal, the Second New Deal, TVA (rural electrification), FERA (emergency relief), CCC (youth work program), AAA (farming subsidies), NIRA (industrial regulation and public works), PWA (public works), WPA (public employment), FDIC (banking regulation), and Social Security all exercising unprecedented Federal power, investor uncertainty was justified and profound.  Roosevelt’s willy-nilly spending legitimized concern that personal fortunes would be entirely consumed.  Capricious policies (often framed by class warfare) caused real fear, not “fear of fear itself,” fanning a bad recession into the Great Depression.  Without doubt, the Crash of 1929 was extremely serious — almost as serious as the great unraveling that started in September 2008.  The Great Depression from 1932 to 1942, however, was Roosevelt’s fault.

FDR’s maelstrom of tax and regulatory change notwithstanding, the Great Depression was not all bad news all the time.  Unemployment, for instance, peaked early, hitting a Depression-era high of 25% in 1932 (though averaging more than 19% for FDR’s pre-war tenure).  So there were employment gains in the years following FDR’s election.  Similarly, stocks rebounded starting in 1933, doubling across 12 months (though plummeting again in FDR’s second term).  These early upticks augured recovery that was not to be: America’s economy remained monumentally dysfunctional for another 10 years.

The Great Depression’s harshest rebuke is not that it was relentlessly bad; it’s that periodic good news always ended up turning worse again, like a false summit.  The persistent reappearance of bad news in the 1930′s directly correlates with investor uncertainty created by Roosevelt’s incessant meddling.  In short, it took a disastrous and transformative presidency to make a “depression” out of “recession” — even if not all months, quarters, and years were uniformly bad.

 Today, just as then, almost one in four working-age Americans (or non-citizens, who also must be counted since they are part of the available work force) are unemployed.  This 25% estimate includes those who previously were not in the workforce but who are looking now, presumably out of hardship.  Tending to confirm this, a recent household survey found 22% unemployed.  Conversely, the latest United States Bureau of Labor Statics (BLS) report puts the number at 9.9%.  The disparity arises because the BLS number counts individuals receiving unemployment checks.  No check?  Not counted.

From what I can tell, the total number of unemployed in America today is at least 37.5 million, rising to over 65 million if the underemployed are included.  These numbers sound too big to be true but can be pieced together from a variety of sources, including the BLS.

 37.5 million unemployed out of 150 million potential workers — one in four.  If this is correct, then where are the bread lines?  First, Americans entered the current downturn far wealthier than ever before.  Many survive today on fast-depleting retirement accounts and strained credit.  Second, massive security nets — welfare, extensive unemployment benefits, disability payments, and school loans — have disguised or deferred the physical presence of otherwise visible hardship and deprivation.  Government-backed programs, many themselves insolvent, are the “bread lines” of today.

 Persistent high unemployment will not soon resolve: job creation currently lags population growth.  About 145,000 jobs must be created every month to reach parity — not growth.  400,000 jobs would need to be created to replace by 2013 the jobs lost since 2007.  Even with a sustained recovery starting immediately, it would take at least eight years to recover jobs lost during the last two.

 One reason the job picture is so grim is that investors are confounded by Federal monetary policy.  Under Roosevelt, just as it is now and was during Carter, Fed policy was an explicitly Keynesian effort to correct unemployment — not a stable-dollar course like Reagan pursued, or Thatcher for the British Pound.  As Margaret Thatcher pointed out in her autobiography, The Downing Street Years, monetary policies must either “hitch their star” to a stable currency or pursue specific social outcomes, such as reducing unemployment.  Never both, it must be one or the other.

 With trillions outlaid in “stimulus,” America is committed to the latter course today.

 Predictably, Moody’s announced this month that the United States AAA credit rating will be cut in 2012 for the first time in history unless current and projected Federal debt is reduced dramatically.  It looks instead like debt will explode when anticipated State insolvencies are transferred to the Federal government, whether as loans to States or by some sovereign bankruptcy proceeding yet to be devised.  A lower credit rating will force America to pay substantially more interest to entice buyers of its debt if, in fact, an adequate market for downgraded United States Treasuries even exists.

 Worldwide, sovereign debt is being serially repudiated.  Private institutional buyers are being told they are going to get a “haircut.”  Portugal, Ireland, Italy, Greece, and Spain (the “PIIGS”) are in process of defaulting.  The Chinese government recently suggested it will bail out Spain (as part of its move to diversify from the U.S.  Dollar), appearing to make China the funder of this century’s Marshall Plan.

 Meanwhile, to ward off deflation, the dollar is being intentionally devalued because it is the only thing the Fed has left to do, the last arrow in its quiver.  And the Federal Reserve, which actively promoted the multiple asset bubbles of the last 20 years, will be unable to manage the inflation genie it is un-bottling.

 There are two ways to default on a loan.  One is to not pay it back, as millions of former homeowners are discovering.  The other is to devalue the currency you pay it back with, and this is what America is doing.  So China, one-time buyer of American dollars, will get a “haircut,” too.

 In reply, China is unloading dollars as fast as their economy will allow, but it won’t be fast enough.  China struggles today with both inflation (at an official rate of eight percent) and their own asset bubble in an all-cash real estate market.  With uncertainty on the rise, China’s ruling class is hedging its dollar exposure by snapping up commodities at a dizzying rate, and conducting some international trade in non-dollar currencies.  The Chinese Yuan has become fashionable lately for world-trade because, as with any monetary system, its legitimacy is based on the issuer’s sustained and perceived future productivity.  Unsurprisingly, China’s expected productivity is about to rival America’s.

 With the Yuan ascendant, the world is voting that Chinese long-term problems are less ominous than America’s have recently become.  The United States is ceding the dollar’s default status as the international reserve currency and there is little in the short run that America can do about it.  This is a grave threat to American prospects and worldwide financial surety.

The significance of the United States Dollar as global reserve currency is not generally appreciated by most Americans, perhaps because only other countries see the impact first-hand.  If Germany, for instance, wants to buy oil it must first buy dollars because oil is a dollar-denominated commodity — ie, it is only traded in dollars.  Or rather, it was: Russia, itself a major oil producer, recently announced trades that will be transacted in non-dollar currencies, particularly the Yuan.

 Until now, if America really needed to buy any major commodity — including crude oil, gold, wheat, cattle, orange juice, coffee, sugar, etc., all priced and traded only in U.S.  Dollars — the Federal Reserve could always just print more dollars.  True, printing money inflates commodity prices worldwide until they reach parity with the newly-devalued dollar — but America would still be able to purchase them.  In the future, if America must first buy the Yuan at whatever price the Chinese say and then buy commodities, significant control over purchasing power and domestic economic stability is lost.

 Which brings us back to uncertainty.  Predictions that recovery will soon grow the world out of this crisis are less valid than predictions it won’t because nobody knows.  No one is sufficiently certain.  Rapid-fire federal and state regulations make would-be investors uncertain.  Uncertain businessmen limit risk by remaining liquid, which means they don’t invest (eg, Apple’s $40 billion cash reserve).  Investors that don’t invest slow the exchange of money, which means money is not in motion.  And money not in motion is like having no money at all, or nearly so.  Perhaps we soon shall be regaled with another “nothing to fear but fear itself” Presidential bromide.

 Atop her dynamic and productive people, America’s County, State and Federal governments squat like rogue leviathans excreting tens-of-thousands of new laws and regulations every year.  Choked by bureaucracy and debt, The United States of America is in no position to save the world from this crisis this time.  Nor should anyone expect that the world will be inclined to save The United States.

 In other words, there is uncertainty.  Not mysterious, fear-of-fear-itself uncertainty; but rational uncertainty.  Uncertainty with a clear and historically-informed basis and a known etiology.  And with this odd certainty of uncertainty, The Great Depression II.

 Perhaps respected investor Harry Shultz’s comment in his final newsletter this month states it best:

“Roughly speaking, the mess we are in is the worst since the 17th century financial collapse.  Comparisons with the 1930′s are ludicrous.  We’ve gone far beyond that.”

 Far beyond, indeed.  The future does not look bright.