FedUpUSA

Archive for the ‘Debt’ Category

Oh look, show trials complete with plea deals that are entered at the same time as are the charges!

Federal prosecutors unveiled criminal charges against three former Credit Suisse Group AG employees, providing a window into the way traders allegedly invented inflated values for mortgage bonds during the financial crisis.

Two of the three men pleaded guilty to criminal charges of conspiracy, admitting they attempted to conceal the scheme from managers in a bid to boost their bonuses.

Yes, and happy days are here again, the bad guys are all in prison and we can all go back to our work.

One employee was captured on a taped call worrying that “someone is going to spot” the inflated prices, prosecutors said. When another employee told his boss he should book a large loss, the boss allegedly balked: “That’s a lot of money, dude,” according to a taped conversation cited by prosecutors.

Wait a second… Taped call eh?  From 2007 and 2008?  Can someone please explain why it’s four years later when we’re seeing these charges?

Oh, I wonder if the delay has anything to do with this?

A U.S. Justice Department source has told The Daily Caller that at least two DOJ prosecutors accepted cash bribes from allegedly corrupt finance executives who were indicted under court seal within the past 13 months, but never arrested or prosecuted.

The sitting governor of the U.S. Virgin Islands, his attorney general and an unspecified number of Virgin Islands legislators also accepted bribes, the source said, adding that U.S. Attorney General Eric Holder is aware prosecutors and elected officials were bribed and otherwise compromised, but has not held anyone accountable.

The bribed officials, an attorney with knowledge of the investigation told TheDC, remain on the taxpayers’ payroll at the Justice Department without any accountability. The DOJ source said Holder does not want to admit public officials accepted bribes while under his leadership.

Say it isn’t so!  I mean, c’mon — there hasn’t been anything going on with bribery when it comes to, oh, Jefferson County in Alabama, right?  We haven’t actually seen municipal officials go to prison while the banksters who booked outsized profits (and after all, for there to be a bribe someone must offer a bribe while someone else receives said bribe) walk around chuckling, right?

But this allegation is a new low — if true, then there are people walking around right now who had indictments filed under seal but the indicted handed over the proverbial “big envelope” and, well, people sorta “forgot” about it.

Read the whole story over at Daily Caller.  It’s disgusting, and one has to assume that if this occurred in that context it is probably not an isolated incident.

On January 29 Bloomberg reported Bing Races to Beat Michigan Deadline for Union Detroit Deal

Democratic Mayor Dave Bing is racing to wrest concessions from 48 bargaining units to erase a $200 million deficit in the home of General Motors Co. and the cradle of the U.S. auto industry.

Otherwise, the city of 714,000 dominated by Democrats may face a Republican-appointed manager with authority to sell assets and nullify contracts. State Treasurer Andy Dillon has said Detroit will run out of cash by May, and called for concessions by early February.

This week, Bing began firing 1,000 of Detroit’s 11,300 employees. The mayor also proposes a 10 percent cut in payments to vendors and doubling the 1 percent tax on corporations.

Bing, 68, has said the city must trim annual employee benefit and pension costs, which have risen since 2001 to $35,000 per employee from $18,000.

“We are meeting, not daily but more than weekly, and there are sidebar conversations every day,” said Al Garrett, president of AFSCME Council 25, which represents about 3,000 employees. “I’m not sure an emergency manager would be any more Draconian than what the city itself is asking, but it’s a real possibility.”

Deal Reached?

Mayor Bing is taking his script straight from Greece where a deal has been “close” for days, weeks, and now months.

Today’s Bloomberg headline does not match the facts presented. Please consider Detroit Reaches Pact With City Unions to Avoid Takeover, Detroit News Says

Mayor Dave Bing and a majority of city employee unions have reached tentative agreement on concessions aimed at avoiding a state takeover.

“This agreement is the first meaningful step in achieving the necessary concessions and structural changes,” Bing, 68, said via Twitter.

The deal, but no details, was confirmed by Al Garrett, president of AFSCME Council 25. The agreement covers about 6,500 of the city’s about 11,000 employees, not including police and firefighters who have resisted a demand for a 10 percent wage cut, he said.

The city and unions must agree to concessions early this month to avoid state action, such as the appointment of an emergency manager with broad powers to cut spending, said state Treasurer Andy Dillon. Dillon is leading a review of city finances, after a preliminary review found it will run out of cash by May, and that it faces a $200 million operating deficit.

Deal Reached? Really? No, Not Really

According to mayor Bing we have an “agreement”, albeit an agreement with no details, and without covering police or firefighters. What kind of deal is that?

What’s Best for Detroit?

The best thing for Detroit would be if there is no deal, or the state rejects the deal.

Unions are the problem and the solution is to get rid of them entirely. That will not happen under Bing, but it could happen in a state takeover.

Bing is not interested in what’s best for Detroit taxpayers nor is he interested is what’s best for Detroit school children where shockingly only 25% graduate high schools. Rather, Bing is out to save as much of the status quo as he can, including his own job of course.

Detroit Schools Bankrupt

Flashback July 24,2009: The Wall Street Journal reports Detroit’s Schools Are Going Bankrupt, Too

Detroit is like many urban  school districts—large, unwieldy and bureaucratic, with a powerful union  that makes the system unable to adapt to changing circumstances and  that until very recently had an indulgent political class that insulated  it from reform. That insulation came in two forms. The first was  neglect. Mayor Kwame Kilpatrick spent several years distracted by a  scandal stemming from his affair with a staffer. He resigned last year,  pleaded guilty to obstruction of justice, and was sentenced to four  months in jail. Had he been an effective mayor, he might have also been a  powerful advocate for students.

The other insulating force was a  conscious decision to wall off Detroit from charter schools. In 1993,  Michigan’s legislature made it difficult to create new charters in  Detroit by declaring that only community colleges could authorize  charters for primary and secondary schools in “First-Class  Districts”—defined as those with more than 100,000 students. Detroit was  the only First-Class District. In  2003 the state, under pressure from the Detroit Federation of Teachers,  turned down a gift of $200 million from philanthropist Robert Thompson  that would have established 15 charter schools in the city. Those charters are needed today.

The  net result has been a school system that’s been coming apart as the  teachers union has dug in its heels. In 2006, the union illegally went  on strike, killing a plan to force teachers to take a pay cut to balance  the system’s books.

Collective Bargaining has Morally and Fiscally Bankrupted Detroit Schools

Read  that again. Under pressure from the Teachers’ Union, Detroit turned  down $200 Million. That was in 2003 dollars. Wow. No doubt the  union  “did it for the kids“.

For more on the appalling behavior of Detroit’s teachers’ unions please see Detroit Public Schools (25% graduation rate) teachers unions opposing highly qualified volunteer teachers.

It is time to kill collective bargaining for public unions, every one of them, and nation-wide, not just Detroit.
Mike  “Mish”  Shedlock – Global Economic Analysis

The Coming Demographic and Financial Disaster – Median income of Americans 65+ is $19,167.  What happens when less affluent youth move back home and clash with older generations?

What happens when a society that prides itself on a middle class and self-sufficiency suddenly starts losing both?  For over a decade the middle class in the US has been shrinking.  This isn’t some speculation but is reflected in the stagnant household income data.  You also have a giant demographic train in that many baby boomers are now retiring in mass.  Over 10,000 baby boomers enter into retirement each day and many have an inadequate amount of savings (if any) to get them through the leaner years.  Couple this with a less affluent younger generation and you have a recipe for financial and social turmoil.  Many of these younger Americans, many saddled with large student debt, are moving back home with parents that have seen their entire home equity evaporate.  Do you think these are happy households especially when the median income of those 65+ is $19,167?

Median income of the old     

There seems to be this misconception that older Americans are simply well off.  The data shows us otherwise:

Source:  US Dept. of Health

What is troubling about the above data is that during some of the most affluent decades in US history, most Americans have very little income in older age.  In fact, most rely on Social Security as their primary source of income:

“Social Security constituted 90% or more of the income received by 34% of beneficiaries (21% of married couples and 43% of non-married beneficiaries).”

How is this even possible?  Keep in mind the average Social Security payout is roughly $1,000 per month and this is fixed.  Since the government has juiced the CPI data most of these fixed income Americans are seeing their energy and healthcare costs soar all the while they are told inflation is virtually non-existent.  Try arguing that after going to the grocery store.

There is also this sense that since many older Americans own their home, they are somehow immune to the housing bubble.  That is not true:

“In 2009, 48% of older householders spent more than one-fourth of their income on housing costs – 42% for owners”

Many older Americans still spend a lot of money on housing even if they are owners.  Much of this comes from property taxes and costs associated with owning a home.  Since many older Americans do own their home this housing bubble crash has harmed their largest asset.

Read the rest at My Budget 360

CBO Confirms Tickerguy’s Projections…..

Here’s the old sign again…

(Reuters) – Gvernment spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country’s total economic output, congressional researchers said on Tuesday.

In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit.

That’s not going to happen, because it can’t.  That number would represent approximately 1/2 of today’s Federal Budget, incidentally.

The bad news is that it doubles again in another eight years.

This is the nature of all exponential functions folks.  Compound growth just is, and it is never, ever sustainable over the intermediate and longer term.  Yet we’ve played this game since 1980, with medical spending by the Federal Government expanding at roughly 9% for that entire 30 years.

What’s worse is that the bolded text is false — in the private sector insurance costs are rising at least as fast as they are in the government.  When I ran MCSNet in the 1990s we were seeing double-digit premium increases every single year, and this is still going on.  The only way to keep it under some resemblance of control was to cut back on the offered services in the plan, but on a “like-for-like” basis there was never a year during my time running MCSNet that we saw increases under 10%. 

Not once.

There is no solution to this problem that can be found with “reform” of Medicare and Medicaid.  The problem lies in the underlying medical system in this country and addressing it must happen there, not through things like Obamacare or changes in the government side.

The ridiculous growth in medical costs have come from ridiculous cost-shifting and obfuscation, along with a completely-unrealistic set of expectations.

Consider the cost of putting a man on the moon.  We can do it, but it’s ridiculously expensive.  Likewise, we can put men in space at the ISS, but on a per-person basis it’s ridiculously expensive.  Ditto for flying in a private jet — yes, you can do it, but it’s ridiculously expensive.

Now consider what would happen if everyone could demand and enforce via government a ride in a moon rocket, a month at the ISS, or the ability to walk into any executive airport and demand that the Lear sitting there immediately take off for Bermuda, irrespective of how much money you had in your bank account!

That’s exactly what we’ve done in the medical system.

Provenge is just one example.  Dendreon developed the drug for late-stage metastatic prostate cancer, a terrible disease.  Statistically it adds 4 months to your life, but costs $100,000.  So for about a quarter of a million dollars per person-year, you can have it — the problem is that you don’t need to have the quarter of a million bucks first, or choose to spend your own funds on the treatment.

Bypass operations and myriad other very expensive procedures, drugs and devices are also part of this problem.  Many chronic conditions have costs in the tens or even over a hundred thousand a year, yet your access to those treatments is not conditioned either by your lifestyle choices that led to the problem (or lack thereof) or your ability and willingness to personally spend the money.

The medical industry capitalizes on all of this and then adds both anti-trust exemptions and intentional forced cost-shifting onto the backs of those who can pay for those who can’t.  This is why the aspirin in the hospital costs $25 — you’re paying for Juanita the illegal immigrant who showed up last night in labor at 7-1/2 months, having drunk and drugged herself during pregnancy while receiving zero prenatal care, and pooped out a severely-underweight kid who’s now in the NICU and is in the process of running up a million dollar tab.  This happens every single day and it is why you can buy the same operation in India, performed by a US trained doctor with US medicines, devices, and operating room equipment with a hospital room that is equipped like a luxury suite in the Ritz-Carlton to recover in for 1/5th the cost of the same procedure here in the United States.

Then there’s defensive medicine.  You show up with a non-specific pain in the abdomen.  The doc checks what he can and rules out appendicitis (an immediate emergency) and a few other things.  Now there’s a problem — he has a list of a dozen things running around in his head that could be wrong with you.  There’s a 10% chance that one of the couple of really nasty ones (such as cancer) are involved but ruling them out will require $5,000 worth of tests.  The odds, however, are 90% that the problem is not serious and is something as simple as a mild case of food poisoning.  Who’s money and risk is involved in the decision as to whether or not to run those tests?  Today, the answer is that they get run every single time because if he doesn’t and you hit the bad dice roll you’ll sue (and win.) 

In short you’re not required to allocate the risk and cost on your own.

There’s no fix for Medicare and Medicaid, nor for the Federal budget, without resolving all of this.  And make no mistake folks, this will blow up and destroy not only the federal budget but privately-provided medical care as well within the next five years if we don’t stop it right now.

The U.S. economy is in effect a counterfeit economy, living on money created from thin air that is unbacked by an equivalent productive expansion of surplus value.

Yesterday we looked at counterfeiting and money printing and discovered they are one in the same: (Counterfeit Money, Counterfeit Policy.) If we apply the same analysis to the U.S. economy, we have to conclude the entire U.S. economy is also counterfeit.

The analysis is not as complicated as store-bought economists would have you think.Much of what passes for “economics and finance” is simply distraction, a sophisticated version of bread and circuses.

Let’s start with two basic concepts: productive value and surplus value.The classic example of a productive asset is a factory that produces goods that have a market value that exceed the input (production) costs. In other words, the factory produces surplus value.

We can measure value by any number of means: ounces of gold, quatloos, sea shells, etc. To keep things simple, let’s just measure value in units. If it costs 10 units to produce a good (including labor, materials, energy inputs, transportation, and a return on the investment to construct and maintain the factory), then the output (products manufactured by the factory) must fetch 11 units in the open market to create 1 unit of surplus that can be invested or spent on consuming other goods or services.

If it takes 10 units of input costs to make a product that is only worth 9 units, then the process generates a net loss. There is no surplus to spend; rather, there is a loss that must be covered by cash, borrowing or the selling of other assets. When the cash, ability to borrow and assets that can be sold all run out, then the enterprise is recognized as insolvent and it closes.

If the factory’s output has little to no market value, then the investment is what we call a mal-investment–an investment that only claimed to be valuable because it was speculative or protected from price discovery in a transparent market.

Our current economic theory holds that any good or service produced has value, which we measure in dollars of gross domestic product (GDP).The intrinsic flaw in this way of assessing value is that it doesn’t recognize mal-investments.

Here are some examples.

– If a military aircraft woefully underperforms and costs so much field commanders dare not risk its combat deployment, then what value was created by its manufacture?

– If it takes 10 units of input costs to produce a biofuel crop that is processed into fuel worth 9 units, then what value was created by the process of making that biofuel?

– If a subdivision of new homes is built in the middle of nowhere and finds no buyers, then what value was created by the construction of these houses?

– If a costly medicine is distributed at great expense in the millions of doses and is discovered to have little to no effect on longevity or other metrics of health, then what value was created by the immense cost squandered on this medication?

In all these cases, the mal-investment was added to the GDP as if it created productive value.The factory and the costly but essentially useless aircraft (think B-1B bomber) were added to the GDP, but they did not create useable military value. The biofuel production facilities were all added to the GDP, even though the process generated a net loss. The homes built in the middle of nowhere were also added to the GDP, along with the costs of the worthless medication.

Consider a financial sector that is declared “too big to fail” and trillions of units are borrowed on the taxpayers’ account to bail out the albatross banks. The bailout of banks created no productive value, even as it took money away from potentially productive investments.

Since surplus value is not limitless, the money squandered on these mal-investments was no longer available for productive investments.Rather, these mal-investments sucked up all the surplus generated by the entire economy. Now there is no money left for superior (and cost-effective) military aircraft, medications that actually cure diseases rather than reduce symptoms, homes that are in desirable, cost-effective locales, productive energy investments, and solvent banks.

Let’s say an economy required 1 million units of input costs to generate 2 million units of productive value, i.e. goods and services whose price has been discovered by a transparent market. That economy has 1 million units of surplus to spend on consumption, productive investments and mal-investments.

Since everything requires maintenance and infrastructure, then there is no such thing as a steady-state economy: for example, factory machines wear out and have to be replaced. If there is no surplus money left because it has been sunk into mal-investments, then the factory’s ability to create productive value and surplus value degrades.

If the mal-investments have been prodigious, at some point the factory is incapable of producing any surplus at all.

There is a “fix”: borrow money based on the future surplus.If the amount being borrowed is modest in comparison to the potential surplus created by a refurbished factory, and the borrowed money is productively invested, then this reliance on credit and leverage may pay off.

But if the borrowed money is spent on consumption and mal-investments rather than being invested in productive assets, then the only “fix” left is to borrow more money–not just mortgaging the future surplus of the factory, but leveraging it into a stupendous sum of borrowed money.

At some point the sums being borrowed far exceed the potential surplus generated by the factory, even if the factory amd market are running at optimum levels.If the factory requires 100 units of investment to generate 50 units of surplus, but 1,000 units of money have been borrowed against that future surplus, then the interest payments on that 1,000 will eventually exceed the modest potential surplus value.

Note that future surpluses are all imaginary; it could turn out that the market for the factory’s goods declines and there will be little to no surplus value created in the future.

Borrowing money based on imaginary future surpluses is a higher form of counterfeiting. And that is precisely what the U.S. is doing, borrowing immense sums at every level, private, corporate and State/Federal, all leveraged against phantom future surpluses, even as the economy requires some 10% of its supposed output (GDP) to be borrowed and spent on consumption each and every year just to run in place, i.e. the Red Queen’s Race (Bernanke, Goldilocks and The Red QueenJanuary 10, 2011).

In other words, the U.S. economy is running a massive deficit, and squandering the vast sums being borrowed on consumption and mal-investments.Once you rely on more borrowing against imaginary future surpluses to fund your current expenses, then eventually the costs of servicing that debt exceeds any possible future surplus.

The last-ditch “fix” is to simply print units of money (or borrow it into existence like the Federal Reserve)–counterfeiting, pure and simple– and deceive the market for a time via the illusion that the freshly printed units of money are actually backed by productive value or surplus.

As history has shown, eventually the market discovers the actual value of this counterfeit money, i.e. near-zero, and the system implodes.

Alternatively, the credit markets grasp that there is no way the economy can pay the interest on its monumental debts, never mind pay back the principal, and then the number of people willing to lend surplus capital to the economy declines to zero, as does the economy’s ability to sustain itself with leveraged debt.

The system then implodes as the “free money machine” of ever-expanding debt breaks down. Once there is no more “free money” to fund consumption and mal-investment, then the reality of systemic insolvency is revealed to all.

You cannot counterfeit actual surplus value generated by productive assets, you can only counterfeit proxy claims on future surplus. That is the U.S. economy in a nutshell: we are counterfeiting claims on our future surplus, even as we squander vast sums on horrifically obvious mal-investments and wasteful, cost-ineffective consumption.

Charles Hugh Smith – Of Two Minds