FedUpUSA

Archive for the ‘Government’ Category

Medicare is an example of an unsustainable system that will go away in the decade ahead.
Here are the sobering facts about the number of workers and those drawing Social Security, Medicare and Medicaid entitlements in the U.S.While the government claims to have a “trust fund” to pay for Social Security and Medicare, this is illusory propaganda. There are no funds set aside to pay these entitlements–they are “pay as you go” programs funded by current tax revenues.  If the tax revenues don’t cover the programs’ expenses, the Treasury sells bonds, i.e. issues debt to pay the entitlements.

Social Security (SSA) has 61 million beneficiariesas of March 2012.

Medicare has 49 million beneficiariesas of November 2011.

Medicaid has over 50 million beneficiaries; another source puts the current number at 58 million.

Kaiser Family Foundation says roughly 7 million “dual-eligibles” who receive both Medicaid and Medicare, so let’s use the data point of 50 million Medicaid-only recipients.

We can assume that most people drawing Medicare benefits also draw Social Security, while the 8+ million drawing disability from Social Security are also covered by Medicaid.

However you slice it, there are roughly 60 million people drawing Social Security and Medicare/Medicaid and another 50 million Medicaid recipients for a total of 110 million people drawing significant entitlements.

As I have noted here many times, there are only 115 million full-time jobs in the U.S.

That means the ratio of workers to recipients of  significant “pay as you go” entitlements is roughly 1-to-1: 115 million full-time workers and 110 million people drawing Social Security and Medicare/Medicaid.

These programs consume the majority of the Federal budget.  The Federal government spends around $3.7 trillion and collects around $2.6 trillion in taxes, so the basic deficit is $1.1 trillion. Off-balance sheet “supplemental appropriations” mean the real deficit is actually considerably higher.

Social Security costs $817 billion, Medicare and Medicaid costs total about $800 billion  annually, and program outlays rise every year. The Pentagon/National Security budget is around $690 billion.

As I detailed in The Fraud at the Heart of Social Security   (January 17, 2011), the program paid out $707 billion in 2010 and collected $631 billion in taxes, a $76 billion shortfall for 2010. The current program (2012) cost is $817 billion, a leap of $100 billion in a few short years as Baby Boomers flood into the program.

Of the roughly 150 million workers in the U.S., 38 million earn less than $10,000 per year, 50 million earn less that $15,000 a year and 61 million earn less than $20,000 annually. All these numbers are drawn directly from Social Security Administration payroll data.

100 million wage earners, or 2/3 the entire workforce, earn less than $40,000 per year.

Median pay in the U.S. is about $26,360 annually, while the average pay is about $40,000. Since the average American household takes in $63,091 per year, it seems the typical wage is roughly $30,000 a year.

The Medicare tax is 2.9% of wages, 1.45% each for employer and employee.If the typical worker makes $30,000 a year for 35 years, then lifetime earnings are about $1 million. If we take the $40,000/year average, then that rises to around $1.4 million in lifetime earnings. The 2.9% Medicare tax thus totals about $30,000 to $40,000 in lifetime contributions for the average worker.

The average benefits extracted from the system run from $393,000 to $525,000  (due to the benefits extended to non-working spouses, benefits for never-married people may be somewhat lower). Average annual costs per beneficiary run as high as $18,000, though expenses typically rise significantly in the last year of life.

As I have reported here earlier, a friend’s father was in the hospital a few years ago for less than a week for “observation” and a non-invasive gall-stone procedure. Medicare was billed $120,000, or roughly the lifetime contributions of three workers for this modest procedure and a few days in a hospital. My Mom had an office procedure performed on one of her toes and Medicare was billed $12,000.  An office procedure (not in surgery) that took a few minutes absorbed 1/3 of my entire lifetime contributions to Medicare.

What we have is a system where the full-time worker to beneficiary is already 1-to-1 and the system pays out 10 times more per person than it collects in taxes.  The Medicare system would need about 10 workers for every beneficiary to be sustainable. Right now the ratio is just above 2-to-1. That simply is not sustainable.

Tweaking the payouts doesn’t change the basic math: “pay as you go” entitlements are not sustainable when the number of recipients equals the number of full-time workers. Programs that pay out $400,000 per person (many of whom did not work a lifetime) and collect $40,000 per lifetime of full-time work are not sustainable.

Wishing the math were different does not make it different.

For more on this topic, please see:

America’s Hidden 8%  VAT: Sickcare(May 10, 2012)

How We Do Harm: A Doctor Breaks Ranks About Being Sick in America (print)     (Kindle)

Charles Hugh Smith – Of Two Minds

At about 13:00 minutes in, a familiar face makes an appearance.   

In this episode, Max Keiser and co-host, Stacy Herbert discuss the alleged meritocracy of old Etonians running the world (into the ground) while the rest of us remain wards of the state – from the President of France to PhDs on foodstamps. In the second half of the show Max talks to John Titus, producer of the new documentary, Bailout.

The film premiers in Chicago on May 16th.  A must-see when it comes to your area.

http://usabailout.com/about

Our markets have a recent history of missing important warnings. It’s no different now as investors deny the obvious and the economy stumbles along.

I have been in the investment business for more than 30 years now, so I have grown accustomed to seeing lunacy, naiveté and just plain stupidity more often than one would think possible, given that investing is supposed to be about being smart.

It seems extraordinarily obvious to me that the economy is, in essence, broken because of the stock and housing bubbles we have experienced, and that the Federal Reserve is trapped. It also seems clear that at some point we will have a funding crisis (bond yields will leap and/or the dollar will tank) due to excessive government borrowing. (Click here for more on this funding crisis.)

However, that’s not going to occur until certain attitudes shift, so I can see why this is taking some time to unfold. What I cannot understand is how folks don’t recognize the fact that, since the economy has been unable to create jobs for three years now, it isn’t going to start magically generating them now.

Nor do I understand why there is such denial about inflation. The everyday cost of living has been increasing steadily, and at an increasing rate. Just because house prices have collapsed and certain products that folks buy, especially those heavily laden with technology, are cheaper does not change the fact that we are experiencing inflation, and that the environment is really one of stagflation. It is obvious, as are the consequences.

Nevertheless, to a large degree in the investment community, Goldilocks rules.

Déjà eww

The mindset seemed familiar to me, and about a week ago I was thinking of past moments in time where the obvious was there for all to see but maddeningly few seemed to see it. What popped into my head was the spike in first payment defaults leading up to the housing crisis. When that started occurring, as early as August 2006, it spelled the end of the housing bubble (while at the same time proving it was bubble behavior, since people were missing their firstpayments).

I actually decided to search my subscription site, www.fleckensteincapi​tal.com, for references to “first payment.” Lo and behold, one of the headlines that popped up was “Goldilocksters see oil prices as bullish, up or down,” which ran on Jan. 11, 2007 (that is, more than a year before Bear Stearns’ liquidity problems came to light). Here are some key excerpts:

“I wanted to share an email from my insider friend in the subprime arena, whom I’ve quoted so liberally. It’s sort of incongruous to read his thoughts on a day when subprime and other financials were going wild, but this (first payment defaults) is a problem that I guess won’t matter until the day it matters — and then boy is it going to matter.

“He wrote: ‘We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built, but it was in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant — worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.’

“‘The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.’”

Note that I received that email on a day when subprime and other financial stock prices were rallying big time, the market completely oblivious to what lay ahead.

Selling yesterday’s news

Just as folks were late in figuring out the severity of the housing crisis, I think they still tend to be late in facing current realities. Case in point: For most of this week, it was as if markets in Europe and the U.S. had suddenly realized that the government in Greece was in disarray; that we were about to have a socialist running France; and that Spain, Portugal and Italy are each a teetering financial house of cards, even though none of that should be “news,” especially to supposedly sophisticated market participants.

In the old days, markets tended to discount events (that is, they reflected expected negative outcomes through lower asset prices, or vice versa). If that were still the case, markets should have declined into last weekend’s European elections as they anticipated the results, as well as other problems. But what we saw were markets that appeared notto have discounted the seemingly obvious news.

I have commented on this phenomenon a number of times over the past 10 years: that only after an important event happens (which was usually pretty obvious) does Mr. Market have a heart attack. I don’t really know why that is, although I think a lot of it has to do with how the government’s money printing has warped the markets by causing people to expect to be bailed out.

You can see a million trees and still not recognize the forest

Where our current path is taking us has been predictable for quite some time, and I think that continues to be the case. Unfortunately, we have elected officials who are completely incompetent, if not criminal, and the Fed is even worse. None of that is going to change until change is forced upon us (i.e., them) by a crisis. So while events seem to play out at a glacial pace, where we are headed couldn’t be clearer.

On the air

I participated in a rather timely interview with Eric King this week. Those who are interested can listen to it here.

Bill Fleckenstein for MSN Money

This morning Jim Cramer, along with the rest of the CNBS crew, actually “endorsed” a return to Glass-Steagall in the wake of the JPM disaster.

When asked “but won’t that make American banks less competitive?” he answered with a bluster that was basically this: “What, like BNP Parabas?”

Yep.

Glass-Steagall is a good idea but it doesn’t go far enough.  The correct solution, as I have repeatedly pointed out, is One Dollar of Capital.

This is the only solution to both preventing banking panics and long-term economic stability.

One Dollar of Capital:

• Stops counterfeiting of the currency.  Without the ability to create unbridled credit money the commercial banks and Fed can no longer create pretend GDP, which instantly reflects into asset prices in a bubble, foisting the costs off on those who cannot take advantage of those asset price increases.  This is how your wealth and future have been systematically and intentionally looted over the last 30 years, and it’s one of the oldest games out there when it comes to banking.  President Jackson knew it, as did others before him; this scam job literally goes back to Hammurabi!  This old con must go away.
• Ends — without question — systemic risk.  Since there is no longer unbacked emission into the economy there is no longer any possibility of systemic risk.  A bank that wishes to loan more than the immediate liquidation value of an asset must attract actual capital from stockholders or bondholders to lend; it cannot create credit money unless it can show a perfected security interest against an asset that is worth more than the credit money created.
• Returns credit to its legitimate function in the economy — self-liquidating lubrication for trade.  A self-liquidating loan is not inflationary and has no longer-term impact on the economy.  It permits the use of credit for legitimate lubrication of commerce; trans-national trade, for example, relies on letters of credit to guarantee payment for goods in transit; the goods are the asset securing the paper.  Likewise, a loan for 80% of a house’s market value is secured by the house, and if marked to the market on a reasonable basis (e.g. every three months or so) it is safe as additional capital calls will certainly occur before the value goes negative.

One Dollar of Capital simply says that you cannot issue unbacked loans.  Period.  You can lend against an asset, but only to it’s immediate liquidation value in the marketplace.  That’s it.

Our current paradigm requires a roughly 6% excess asset valuation in banks.  We retain this standard.  Banks are then free to choose how close to that line they wish to dance; invasion of that 6% safety threshold results in immediate liquidation of the firm.  If they wish to lend at 94% of a house’s value they can, but any movement against them results in the position going underwater.  Most will choose to build in some sort of reasonable cushion — like 20% down — to prevent this.

All derivative positions must be individually reserved; nobody may depend on someone else’s promise to cover a transaction as a promise is not capital.  If I wish to be short a derivative that requires me to deliver a given instrument then at the instant that position goes into the money against me I must be able to clear the underlying trade and must possess the actual capital to do so.  If I can’t clear the trade at any instant in time then my firm is liquidated — period.

It’s not that difficult to understand folks.  Oh sure, the mavens of Wall Street have screamed bloody murder about any such proposal, claiming that this would “damage American competitiveness in financial services.”

My retort in 2008 was “If you wish to juggle jars of nitroglycerin I hope you don’t mind if I ask that you do it in your country rather than in ours.”

Now, four years on, we’re finally hearing similar sounds in the mainstream media.

The effect of this regulatory change would be to end derivative trading by any actual bank.  “Investment banks”, which take no deposits and are funded entirely by investor capital with no ability to write credit money into existence, can trade all they want.  Margin supervision is perfectly adequate here, as the risk lies entirely within that firm.  That’s fine.

As I wrote in Leverage (click on the book cover to the right to buy):

But One Dollar of Capital as presented above both goes further and shuts down all the schemes and risk-hiding that banks can engage in, making a bank an effective public utility, while retaining private ownership of the financial system. Whether a bank takes deposits under this standard becomes immaterial as deposit-based lending cannot happen on an unsecured basis.  Banks that wish to loan against a known asset value can do so but to lend unsecured they must acquire lent capital from the market via the sale of stock or bonds, and cannot use depositor funds for this purpose.

We must end the unbacked emission of credit money into the system.  That is where all of these problems come from — fake GDP, destruction of purchasing power, buying of votes and systemic instability.

It all begins and ends there and any Presidential, House or Senate officeholder or candidate who does not understand this is unfit to hold the office.

Those who do understand this and yet refuse to act are aiding and abetting economic terrorism and must be held to account.