Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

April 2010 - Posts

Government and Banks Complicit in Fraud

Government and Banks Complicit in Fraud

Just as the major banks report super earnings, Richard Koo issues his report on their condition. If banks were required to keep honest books and mark their assets to market, there would be no earnings and both the finance and real estate industries would collapse.

As described by Zerohedge:

Richard Koo’s latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US – finance and real estate, would be bankrupt. “If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt.” In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman’s mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

This is devastating news for those that believe the economy is in a recovery, but not news for those who understand what is going on. The government is desperate and complicit in fraud to prevent the collapse of the economy. Unfortunately, they are trapped and there is no escape.

The strategy with the banks cannot work because there is no way short of major inflation that real estate regains the value necessary to correct this problem. Even that is unlikely to work because wages are unlikely to keep pace with inflation, causing commercial real estate bankruptcies. The employment situation and overseas competition (labor arbitrage) is likely to make the inflation scenario a non-winner.

At this point, nothing short of some unknown miracle is likely to save the economy. I cannot even fathom what that miracle might be, never mind its probability of occurrence.

To read Zerohedge’s full commentary and the Richard Koo report, go to the website.

Monty's Related posts:

  1. Middleton on Banks (8.013)
  2. BIS Worried Central Banks Have Put Countries at Risk (7.585)
  3. Jimmy Stewart Wouldn’t Run These Banks (7.432)
  4. Corruption Rules: Stimulus Fraud (6.647)
  5. Market Values of Banks (6.416)

Governments Forced into Pain

Governments Forced into Pain

Here are some links regarding the economy from Chris Martenson’s site from April 21.

Welcome to the new reality. These adjustments are long overdue and are forced on governments that have long lived beyond their means.

It is likely that all of these cuts are merely small down payments for what is truly needed. Many people recognize that the world has changed. Governments are the last to react.

More Than 1,300 San Jose Employees Receive Layoff Notices

The notices affect 1,123 full-time employees — more than a sixth of the full-time workforce — across all city departments, from police to parks to libraries, said Mark Danaj, the city’s human resources director. The city manager’s proposed budget, which will be released May 3, is expected to eliminate 644 filled positions.

Because of civil service rules and union seniority rights, an employee whose position has been cut may take the job of another worker who has worked fewer years for the city, setting off a cascade of “bumping” that can take weeks to sort out.

Layoff Notices Sent To 2,000 Detroit Teachers

About 2,000 Detroit Public Schools teachers have received layoff notices as the district’s financial manager continues to pare down a $219 million budget deficit. Steve Wasko, a spokesman for Robert Bobb, confirms Tuesday that notices have been mailed but says many teachers likely will be returned to work.

U.S. Public Schools Face Threat Of Tens Of Thousands Of Layoffs

Prince George’s County schools plan to cut 800 positions, many through layoffs, in the third straight difficult budget for a school system that is battling to improve uneven academic performance. That will mean an average of 29 students per class, up from 27, in the coming school year. p>

How To Eat Well On A Food Stamp Budget

At the end of last year, roughly 1 in 8 Americans received food stamps, the highest rate ever. Though not everyone succeeded in staying within budget, the lessons learned were universal. All three said planning and careful shopping were key, as was a willingness to recast leftovers. They also championed chicken as an inexpensive and versatile protein.

Tax-Weary New Jersey Voters May Reject School Budgets

Christie, a Republican who took office Jan. 19, said voters should nix budgets in districts where unionized employees refuse to take pay freezes to help solve the funding crisis. Residents should be outraged that teachers get average raises of 4 percent to 5 percent and free or low-cost health care, he has said.

“The unions have pushed us to the breaking point,” said Bob Bailey, 60, a corporate administrator from Millstone Township who said his annual property-tax bill is $13,000.

Lawsuits Over Illinois Budget Mess Could Be Coming

Thousands of state vendors could face the prospect of having to go to court to collect money they are owed by the state.

In a memo to legislative leaders Tuesday, Gov. Pat Quinn acknowledged the possibility that the state’s budget mess could force angry vendors to file lawsuits with the Illinois Court of Claims this fall…. As of Tuesday, the state owed $4.5 billion to individuals and companies that sell products and services to the state.

INDIANA: School Board Wades Into Budget Details (Indiana County)

This is the year retirement fund contributions will increase from 4.78 percent of employee salaries to 8.22 percent. The rate jumps to 10.59 percent for 2011-12, then to 29.22 percent in 2012-13.

Translated to dollars for the school district: The 2009-10 contribution is $1.1 million, which increases to $1.9 million in 2010-11, then to $2.6 million and $7.5 million the next two years.

Monty's Related posts:

  1. Economic Policy is Wrong and Prolonging The Pain (7.354)
  2. Our Government? No, All Governments (7.276)
  3. Is it Learn and Eat or Eat and maybe Learn? (6.859)
  4. MASS LAYOFFS – AUGUST 2009 (6.46)
  5. Government is Falling Apart (6.423)

Political Fatal Conceit

Political Fatal Conceit

Economists and lawyers think differently. Economists believe incentives are more effective to alter behavior; lawyers believe that coercion via laws is the way to affect behavior.

The parable of the Sun and the Wind are illustrative. They are both intent to get a man to remove his overcoat. The Wind tries to blow the coat off, an action which only produces behavior that makes retention of the coat more valuable. The Sun heats up, making removable of the coat more comfortable than retention. In the latter case, the man willingly removes his coat.

In the parable, the Sun behaved like an economist providing incentives to alter behavior, while the Wind behaved like a lawyer trying to coerce behavior.

In Washington, most elected politicians are lawyers. Too many believe they can achieve desired behavior via coercion. They distrust incentives and markets. All problems are seen as having legislative solutions, i.e. coercions or controls. Our current financial mess is being approached in such a fashion.

There is no real reform under way for the banking system. If real reform were intended, the following bank expansion, as reported on from the NY Times, would not have been permitted and encouraged:

In the last year and a half, the largest financial institutions have only grown bigger, mainly as a result of government-brokered mergers. They now enjoy borrowing at significantly lower rates than their smaller competitors, a result of the bond markets’ implicit assumption that the giant banks are “too big to fail.”

George Schultz

Instead of worrying about the real problem, the Administration and Congress took the populist route of demagogy, attacking the executives and their pay levels. While many believe those attacks were not unwarranted, they were political diversions and not constructive to producing any solution.

Size matters! The moral hazard associated with too-big-to-fail enables large banks to engage in more risky behavior than prudent. Because of the implied government “put” to save them, investors and depositors are provide funds in excess of what they otherwise would. The normal corrective forces of the free market are negated by such a “put,” enabling big banks to engage in bad behavior.

When George Schultz was Treasury Secretary and approached on the “too-big-to-fail” issue, he is reputed to have responded: “Well then, make them smaller.” That was the right advice then and now. However, according to the Times:

… there is no attempt to break up big banks as a means of creating a less risky financial system. Treasury Department and Federal Reserve officials have rejected calls for doing so, saying bank size alone is not the most important threat.

Gary H. Stern, former President of the Minneapolis Federal Reserve Bank and co-author of “Too Big to Fail: The Hazards of Bank Bailouts,” described the current bill as follows:

It tries to address the problem but it’s half a loaf at best. It doesn’t address the incentives that gave rise to the problems in the first place.

The belief that Washington is able to design any legislation for any purpose would be laughable if it were not so harmful. Can anyone point to a single government program that has been successful in terms of its original intent and costs? Is there anything that has ever been “regulated” properly?

Any bill that passes without breaking up the large banks is doomed to failure. It will ensure a repeat of this crisis, except on a larger scale. Past interventions created the conditions for this banking crisis. The impossibility of effective regulation enabled it to fester and grow.

Congress now proposes more of the same. Apparently, they don’t understand the definition of insanity as attributed to Einstein: “doing the same thing over and over again and expecting different results.” Or perhaps they do and are arrogant enough to believe that they can legislate anything, including legislating away the law of unintended consequences.

The issue is not bad regulations, bad regulators or bad bankers. The issue is complexity. No one person or group is capable of writing effective legislation for complex markets. No legislation can replace market monitoring and discipline. That would be true even if regulators were not influenced by politicians (the Public Choice argument).

To believe otherwise, is to engage in what Friedrich Hayek termed the “fatal conceit.” According to Greg Ransom, who made this observation almost a year ago:

The interpretation of Barack Obama and his government as an instantiation of what Friedrich Hayek examined in his classic book The Fatal Conceit has become one of the dominant narratives of today.   In May John Stossel wrote a widely circulated pieceon the topic.  This week, Thomas Sowell weighs in.  So does Sheldon Richman.  And also Ralph Reiland.  I’m guessing we’ll be hearing more about this over the next month and year.

The only way to solve the financial crisis is to allow markets to discipline bad banks. Effective reform of the banking system can only be achieved two ways:

  1. Break-up the too-big-to-fail banks and preclude them from attaining the size where that adjective would ever apply again.
  2. Revisit the entire concept of banking to move it closer to free-market banking.

Both solutions would be amenable to bank failures without bailouts. The threat of real failure re-introduces market discipline to banking. It provides an incentive for bankers to not take the additional risks that increase the probability of failure. Nothing being talked about in Washington today achieves that goal.

A financial bill will pass. It will be accompanied by all the celebratory hoopla that infects Washington. It will not break up the big banks. It will be another Washington charade, designed for the rubes that are expected to vote in the next election. This kick-the-can behavior is what got us into the mess and guarantees an even bigger crisis in the future.

Eventually, the crisis will repeat. It is probable that the next crisis will produce a worldwide collapse of the banking system. At that point item number 2 above, the real solution, will be addressed.

When that point is reached, we will have come full circle back to the old Jefferson-Hamilton debates about banking. Hopefully, Jefferson will then have been seen to be correct, and the world can get a banking system that serves the people rather than the bankers. Properly designed, banking will no longer be the cause of periodic business and financial crises.

This article originally appeared on American Thinker today

Monty's Related posts:

  1. JP Morgan the New Lehman Brothers? (6.406)
  2. Wait til You See the Banking Crisis! (5.799)
  3. “Too Big To Uncover” (5.446)
  4. Political Turnaround Specialists Needed (5.403)
  5. Political Cannibalism Democrat Style (5.309)

China May Not Be Answer

China May Not Be Answer

China is supposed to be the engine of growth that gets us out of the economic crisis. The following document suggests that is unlikely to be the case. According to Katsenelson, China may become another economic basket case in a similar fashion to Japan.

To view the presentation, I am afraid you will have to go to the post on my site. Sorry, could not embed it here. 


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Your Federal Reserve at Work

Your Federal Reserve at Work

I have often characterized the government as a cornered, wounded animal willing to do or say anything to survive. The Fed, of course, is nothing more than a servant for Washington. The following article appeared as a guest post at Naked Capitalism. It is apt to be shocking to those who believe that the government is looking out for your interests. Of course the country was warned about central banks long before their

Guest Post: “Never Even a Whisper” at Fed’s Open Market Committee Meetings

Washington’s Blog

Ben Bernanke, William Dudley and Donald L Kohn are on the Fed’s Open Market Committee(FOMC).

They are also on the board of directors of the Bank for International Settlements (BIS) – often called the “central banks’ central bank”. And Kohn is an alternate director for BIS.

Alan Greenspan, of course, was a BIS director for many years.

Dudley is also chairman of BIS’ Committee on Payment and Settlement Systems. (Tim Geithner – previously on the FOMC – previously held that post).

So there is clearly quite a bit of overlap between the two groups.

In addition, BIS’ chief economist – William White – and others within BIS – repeatedly warned the Federal Reserve and other central banks that they were setting the world economy up for a fall by blowing bubbles and then using “using gimmicks and palliatives” which “will only make things worse”.

As Spiegel wrote last July: « Continue reading Your Federal Reserve at Work »

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Tutor a Keynesian Today

Tutor a Keynesian Today

Ludwig von Mises

von Hayek

The Austrian School of Economics is gaining more adherents as this economic crisis lingers. Keynesian Economics has caused many of the current problems. More and more people outside of Washington recognize this linkage.

The Austrian School has never been simple in the sense that the economy can be modeled by simplistic equations. But then, neither is the real world simple. Perhaps one way to describe this school is “common sense.” There are no magical formulas to achieve better living conditions. Most of the veracities passed on by our ancestors and parents apply to good economics.

Ty Andros cites what he calls the 7 commandments of the school. Others will object that he has left items out, but these seven are not bad for a layman trying to grasp what the school represents:

The Austrian School’s Seven Commandments:

  • The Austrian free-market economists use common sense principles.
  • You cannot spend your way out of a recession.
  • You cannot regulate the economy into oblivion and expect it to
  • function.
  • You cannot tax people and businesses to the point of near slavery and
  • expect them to keep producing.
  • You cannot create an abundance of money out of thin air without
  • making all that paper worthless.
  • The government cannot make up for rising unemployment by just
  • hiring all the out of work people to be bureaucrats or send them
  • unemployment checks forever.
  • You cannot live beyond your means indefinitely.
  • The economy must actually produce something others are willing to

After reading the above, you undoubtedly are tempted to say, “but I knew all of this.” All that means is that you are not a Keynesian economist. You have common sense. Tutor a Keynesian today; a mind is too precious to waste.

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Ron Paul Polls with Barack Obama

Ron Paul Polls with Barack Obama

The mood of the people in the US is clearly changing. Whether the turn reflects itself in governmental policies or not is moot. If it does not, then this country is in for social and political unrest, perhaps to an extent not seen since the 1860s.

An indication of the mood swing is demonstrated by the fact that Ron Paul now polls even with Barack Obama. These two men have vastly different visions of the role of government, so different that they are incompatible with each other. This polling data and the continued rise in the popularity of the Tea Party movement suggests a growing schism that cannot easily coexist with President Obama’s vision of America.

It is unlikely that Ron Paul is a viable candidate for the highest office in the land primarily because of age, but also because some of his libertarian positions are still considered radical by the populace. His popularity is more symbolic and owes to his core positions rather than his persona. These positions, embraced by a younger, more dynamic figure, would produce a real choice most Americans have yearned for.

Whether some politician can step in as the “new Ron Paul” is not known. Yet the tension between the old Barack Obama and the old Ron Paul defines the schism in US politics. It would be hoped that a candidate would be found for 2012 that represents the growing discontent with the direction of the country. That would provide a true referendum on the two competing visions. Better that the verdict is determined at the ballot box rather than other means.

The Washington Examiner (via AP) and published in the Daily Bell describes the Paul popularity below:

Hating the government finally goes mainstream … Three years ago, the Republican establishment piled scorn on the presidential candidacy of Ron Paul. Today, he is in a statistical tie with President Obama in 2012 polling. His son, an ophthalmologist who has never run for elective office, is well ahead of not only the GOP’s handpicked candidate for Senate in Kentucky but also both Democratic contenders – all statewide officeholders.

What happened? Did America suddenly develop an insatiable appetite for the 74-year-old, cranky congressmen from Texas? Is the gold standard catching on? Paul will not likely be the next president. And his son still faces the most arduous part of his journey as Democrats spend millions to paint him as soft on defense, lax on drug enforcement and too radical on welfare programs.

But there’s no doubt that hating the government and the powerful interests that pull Washington’s strings has gone from the radical precincts of the Right and Left to the mainstream. It turns out that watching Goldman Sachs, the United Auto Workers, public employee unions and a raft of other vampires drain the treasury at America’s weakest moment in a generation will make a person pretty hacked off.

Gaming the System
Gaming the System By Monty Pelerin, posted April 16th, 2010 Folks, understand what is happening here to cover up the condition of the banks and the economy. I just spent several days with my cousin, an MD from rural Missouri. His tales amazed me, and I am not used to being amazed as to how people are abusing the system. In his case, it was the medical health care system. Of course these grifters did not limit themselves to medical fraud, but also participated in welfare and other schemes to live at taxpayer expense. It seems we have bred an entire new class of people that are keen to living off the government teat whether they are entitled to or not. I will not try to repeat any of the stories or schemes. These tales could be told about any area of government programs. The graft, fraud and abuse are apparent to anyone with eyes open and willing to investigate. The fraud perpetuated in the banking system is not yet seen or understood by the public. Rage and disgust prevails over the bailouts, but the real fraud is yet to be revealed. Banks are in desperate shape, despite what you are being told. The sad part of this story is that the government knows their condition and has done everything it can to ignore and cover up the insolvency problem in the banking system. It is a desperate attempt (that will fail) to pretend that this is just another ordinary recession. Do not believe that we are recovering for a moment. Banks are not normally kindly sorts. They do business to make a buck. Often we hear stories about how they foreclose on widows, shut down businesses, etc. etc. One can either believe they have changed their stripes or that desperation is the norm when one looks at some anecdotes from Financial Armageddon: My 25 year old niece had $10,000 of outstanding credit card debt. Recently, she told the bank she couldn’t pay. She is not unemployed so the ‘hardship’ is all relative. Nevertheless, the bank offered her a concession which she refused. They offered another concession, she refused again. Finally, they told her if she paid $150/month for 2 years (total of only $3600 with no interest), they would call it paid in full! She accepted in a heartbeat. It is less than a month later, and she celebrated her good fortune by going on a cruise to Hawaii. A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down pmt. One year after her purchase she pulled $75,000 home equity and purchased ‘fun stuff’ including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister’s name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car. Almost everyone in my “survey” is aware of, or knows someone living rent free in their home for an extended period of time, having stopped paying their mortgage. Many of these free boarders are spending lavishly on non-essentials. My hard-working part-time assistant knows two different 35+ yr olds who have enjoyed over 9 months (one is up to month eleven) of rent-free living in very nice homes they purchased in 2004/2005! Both are employed and both enjoy a non-frugal lifestyle. My assistant wonders if he should do the same or have me pay him more so that he too can enjoy the ‘good life’. My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn’t like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven’t yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple. My brother-in-law wanted to know if he should stop making payments on everything. He lives in Virginia and his carpentry skills are not as marketable as they were in the height of the boom. He and his wife’s best friend have lived close-by for many years. For the past 13 months since they strategically decided to stop paying their mortgage, they had yet to be contacted by their bank. Not even one letter! My brother-in-law doesn’t understand how they get to pocket the mortgage and spend carefree, including a 10-day Caribbean vacation. It would appear that our entire society has been corrupted by government largess. It will not be pretty watching this entire facade collapse. You can believe that banks suddenly became altruistic (at your expense, I might add). I regard this behavior as desperation. The situation is so dire that they cannot take additional write-downs on loans. I believe the banking system is so tenuous that ignore and pretend is their only alternative. Share/Save Related posts: The Cash for Homes Boondoggle (5.081) Bank Failures On Rise (4.628) Jimmy Stewart Wouldn’t Run These Banks (4.282) Headlines vs Reality (4.254) Banking Mess (4.003)
Welfare States - R. I. P.

Welfare States - R. I. P.

“The worst thing in the world next to anarchy is government.” Henry Ward Beecher

Bloggers post what they claim to be the “scariest economic chart” or the ”chart of the century.” Indeed, many data sets are frightening, but none more so than the one to the left. Modern government has failed. These countries are insolvent and will default.

Jagadeesh Gokhale compiled these figures on European debt. This data shows incontrovertibly that all western democracies are on death row. The unlimited welfare state is the cause. Some governments are delusional, believing they can continue on their present paths. Others cling irrationally to hopes of some miraculous reprieve. All are dead men walking.

Government has always been inefficient and mostly ineffective. For most of history that was inconsequential, because governments had limited roles. Monarchies and various forms of authoritarianism had no reason to buy votes. That changed when participative government was instituted. The dangers of participative government devolving into democracy were well understood:

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” – Alexander Fraser Tytler, 18th century Historian and Jurist

“Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide.” – John Adams

Otto von Bismark


In the 1880s Otto von Bismark instituted the first welfare state. Other governments followed with varying time lags. The Progressive Era in the US created the Federal Reserve and the Federal Income Tax, both in 1913. They provided powers never intended by the Constitution. In the late 1930s the US started a social security system, the last developed country to do so.

Once democracy was unleashed, citizens voted themselves benefits. Keynesian economics assisted politicians in their quest for votes.  James Buchanan and Richard Wagner observed in Democracy in Deficit:

“With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism.”

The last barrier to fiscal irresponsibility was removed in 1971 with the introduction of universal fiat currency. In the last 50 years, the US has not had a true surplus. Keynes’ theory, which envisioned deficits in slow economies offset by surpluses otherwise, was co-opted by the political classes. In less than seventy-five years, all welfare states were insolvent. The graphic below depicts government debt to GDP ratios around the world:

From Financial Armageddon

Reinhart and Rogoff, based on their 800-year study of sovereign bankruptcies, determined that 90% of GDP was a critical level of debt and usually ended in sovereign bankruptcy. The US government has $12.5 Trillion of funded debt, almost 90% of last year’s GDP. The above graphic only shows debt held by the public. In the case of the US, about $5.5 Trillion is held as IOUs in the Social Security “trust fund.” That fund is no longer producing cash but demanding it as of this year.

The following chart provides actual and projected figures for major countries:

From Zerohedge

As bad as these numbers are, it gets worse. While serious enough, funded debt is not the big problem. Unfunded entitlements (Social Security, Medicare and Medicaid) are. In the US, these were estimated to be $106 Trillion. The GDP of the US was $14.1 Trillion last year, meaning total debt was 840% of GDP. The table at the upper left shows the US at 500% of GDP rather than 840%. That number reflects the present value of the unfunded liabilities out to 2082. The larger number, provided by the trustees of the plans, is based on an infinite time horizon. Jagadeesh Gokhale provides the rationale why this horizon is proper.

The same table shows European debt at 484% of GDP, but this figure seriously understates liabilities. European numbers are only reflected out to 2051. Were the numbers calculated to 2082, they would be larger than the US number. Furthermore, if the calculation were done on an infinite time horizon, it would exceed the US figure of 840%.

Because the data were unavailable, precise numbers cannot be determined. Three important reasons support the conclusion that they are worse than the US:

  • The US unfunded liability for Social Security, when calculated to 2082 is only one-third of the liability when calculated to infinity. Total US unfunded liabilities to infinity are 100% larger than the 2082 number.
  • Europe’s economy grows slower than the US, exacerbating its welfare burden in the future.
  • The demographics in Europe (fewer young people supporting the old) are more severe, imposing more imbalances on social systems in the future.

Based on these considerations, it appears that the European average of 484% would be substantially higher than the US figure of 840% if calculated comparably.

To illustrate insolvency, the US will be used. Similar calculations apply for the other countries. The numbers are actually far worse for all countries when shown against tax revenues, the means by which government can service their commitments. In “Spiraling to Bankruptcy” it was shown that the US cannot possibly service their commitments. The analysis used numbers from one year ago, less unfavorable than current numbers. From that post:

Send in an Additional $1,525,000 With Your Tax Return: To further put the problem into perspective, the Federal Government owes about $112 TRILLION in actual debt and social promises. Assuming a total population of 315 million people, the portion of Federal Government debt that is owed by every man, woman and child in this country is about $381,000! Or, a family of four owes $1,525,000 of which they are unaware. This amount is in addition to whatever mortgages, credit card debt, car loans or other loans a family might have.

Would You Give This Man a Mortgage? … The Federal Government collects about $2.5 Trillion in total revenues a year. That is from all sources of taxes and fees. Think of that as an individual’s annual gross salary. The debt owed by the Government can be looked at as a great big mortgage. Thus, we have a family that has a mortgage 44.8 times greater than gross salary. That would be the equivalent of a man earning $50,000 gross salary having a mortgage of $2,240,000! An interest-only mortgage at 6% would require the family to pay annual interest of $134,000 per year. A conventional mortgage would be much higher. The example becomes even more ludicrous when one recognizes that taxes, food, clothing, savings, etc. all have to be subtracted from gross pay to determine what is left for debt service.

Debt Death Spiral: The Federal Government is in what is known as a Debt Death Spiral. They are unable to pay the actual and implied interest on their debt. Hence, the unpaid balance is added back to the amount owed, making the problem worse next year. This debt spiral is growing exponentially. There is no way to escape a certain mathematical end.

The US is insolvent. Mathematically, it is impossible to service the obligations without defaults. It is highly improbable that inflation can solve the problem, although that will probably be tried. Europe is in a worse condition. Japan, not shown, is in a similar state.

In the US, the numbers are even worse than they appear. Gimmickry extends beyond accounting. For a sampling, see “Government is 79% of the Economy.” In addition, more than unfunded entitlements are unaccounted for. Per the Wall Street Journal:

The bigger issue is that all of Fan[nie] and Fred[ie]’s liabilities, whether kept inside the companies or hidden in a dark corner of the Treasury, are now Uncle Sam’s responsibility. Moving their bad assets into a new Baddie Mae would only preserve the fiction that there is a difference between the government’s obligations and those of Fan and Fred. Not even Barney Frank could believe that any more.

Proper accounting for Fannie and Freddie would add over $5 Trillion of additional government debt. That would raise the debt obligation of the US government to $18 Trillion, well above the 90% of GDP that Reinhart and Rogoff consider critical.

The welfare state, a relatively recent historical concept, has failed miserably all around the world. The inability of politicians to say no or not play Santa Claus appears to be universal. It has every welfare state headed for bankruptcy. It is unlikely that politicians will act to head off this problem, but markets will eventually put these states out of their misery. Unfortunately, more damage will be done while we await markets to ring the bell that tolls for the welfare state.

It is ironic that the first democracy, Greece, may also be the first casualty. But then, they went through this process before, eons ago.

Monty Pelerin published an earlier version of this article on PajamasMedia.

Related posts:

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Becoming Poorer

Becoming Poorer

Federal Reserve Monster

For many years I have believed the US as a people are getting poorer. Two-income families did not arise as a result of the women’s liberation movement. They arose out of necessity. The primary bread-winner’s real earnings were not enough to support the family.

Inflation has masked the effects of what has been happening to the average citizen.  I am not a big believer in the BLS-published CPI data, or for that matter in many government-issued statistics. For reasons why, see John Williams’ work. Yet, even using the government’s numbers, real weekly wages today are lower than where they were in 1964! Using the same figures, the government has destroyed over 80% of the purchasing power of the dollar since 1971.

In an honest economy (by that I mean one where money holds its purchasing power and provides realistic price signals to the economic actors), goods get cheaper every year because of productivity increases. In such an economy, even without wage increases or promotions, peoples’ standards of living improve as a result of price decreases.

Stable to declining prices were normal during the 19th Century. The standard of living increased rapidly during that era.

Since the inception of the Federal Reserve, the dollar has lost about 96% of its purchasing power. Recently, the decrease in purchasing power has accelerated, amounting to over 80% since 1971. Price and interest rate distortions have created malinvestments and too much consumption.

Since the late 1970s, our economy has been growing more slowly, producing fewer jobs.  Incomes have not kept pace with inflation. The following anecdotal evidence provides an idea of what has happened:

  • In the early 1960s, one could pay for a year of college with a summer job.  Today, students are forced to borrow even if they work during the summers and during the school year. Many come out of college with staggering debts.
  • In 1967, the average US automobile sold at a retail price equivalent to $1.00 per pound. That same automobile today costs around $8.00 per pound.
  • Families in the 1960s could afford to buy homes and put 20% down. Home prices are so far out of line with incomes in most parts of this country that that is no longer possible for most families.
  • In the 1960s health insurance was a relatively rare benefit. Doctors made house calls. Fees were about $10 for a visit. People paid out of pocket, including for major medical expenses.
  • Coke and Pepsi cost about a dime in the early 1960s. A six-pack of beer was a $1.00. Now we pay $1.25 for a bottle of water.
  • The real weekly wage is below where it was in 1964 and has been since 1977.

Most of these items increased faster than the so-called cost of living as measured by the government. All increased faster than wages. Despite increasing nominal incomes, most Americans are getting poorer.

From a slightly different perspective, assume a person earned $15,000 as an accountant in 1971. Using the government’s inflation numbers, he would have to be earning $75,000 today to just stay even. (Of course, because of taxes, even that would not be enough). Some of you might be saying, that’s about right because that was what I was earning back then, and I make about $75K now. Kudos to you. But there is at least one flaw in your thinking.

Presumably you have taken on additional responsibilities over the period. Probably you have had a few promotions and title changes. Under these circumstances, you have lost ground to inflation because you are doing a different, more demanding job. Only if you are doing the exact same job, would you have kept pace with inflation. Even in that situation, presumably you have become more skilled at that job over time, yet that is not reflected in your pay.

Another factor is the manner in which the government calculates its inflation statistics. As mentioned above, John Williams has tracked this for years and argues that, due to changes in methodology, the government is understating real inflation. Using his rather than the government’s numbers would make things appear much worse.

The motivation for this post came from “It’s Impossible to “Get By” In the US” by Graham Summers who dissects how the median income in the US is no longer enough to live on. He concludes:

In plain terms, even if you are extremely frugal and careful with your money, it is virtually impossible to “get by” in the US without using credit cards, home equity lines of credit or burning through savings. The cost of living is simply TOO high relative to incomes.

Summers ignores purchasing power as a determinant in his explanation although does allude to it in his conclusion as to why we cannot have a sustainable economic recovery:

This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).

Summers’ article is worth reading to appreciate what has happened to the average consumer in this country. Many will be amazed to see how the trickle of inflation coupled with a slow or no-growth in incomes has made us all poorer.

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Is This a Recovery?

Some Recovery!

There is no economic recovery. All you are hearing is desperate propaganda from a dying government. Do not fall for their spin!

Tyler Durden of Zerohedge provides this great information on tax collections and tax refunds. There is no way that a recovery is taking place without incomes going up. Both data indicate that incomes continue to drop.

We here at Zero Hedge have gotten tired of the endless propaganda and lies coming from the US Treasury regarding its “prudent” cash management. As we demonstrate weekly, gross tax withholdings have collapsed in 2010 compared to the even disastrous 2009. Through the 14th week of the calendar year (not fiscal), cumulative tax withholdings in 2010 are $477.9 billion, $13.5 billion less than the $491.4 billion in 2009. Yet regardless of what the only organic source of revenue for the Treasury looks like, the Treasury (and IRS) are issuing ever increasing tax refunds with the abandon of a drunken sailor. The chart below compares how many more refunds on a cumulative basis have been issued in 2010 compared to 2009. Oddly, it is also $13 billion, however in the wrong direction.

A side by side comparison of weekly individual refunds indicates that as we get closer to April 15th the government is putting ever more money in the pockets of taxpayers. The week of April 9, 2010 saw 21.5% more refunds in 2010 compared to 2009.

Net out refunds from gross withholdings, shows just how blatant the lies is that the Treasury is collecting more money than previously. On a cumulative basis 2010 compared to 2009 has seen a net $26.5 billion less withheld by the Treasury. We fail to see how this number is in any way an indication of efficient money management. Coupled with record unemployment benefit outlays, surging discretionary spending, and record net bond issuance, and the US Treasury is rapidly realizing that should it be unable to fund itself using its Bernanke-Jiabao Tungsten credit card, it is all over.

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American Pie

American Pie

In all good humor there is some truth.

The following is no exception: AmericanPie

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Posted: Tue, Apr 13 2010 7:46 AM by Monty Pelerin
Filed under:
Getting serious about Spending

Getting serious about Spending

“I’ve proposed a freeze in government spending for three years. We have gone through every department’s spending line by line, item by item, looking for inefficiency, duplication, and programs that have outlived their usefulness.” President Obama, February 1, 2010.

I almost categorized this post under humor. If it weren’t so sad and serious, it would be great humor.

Randall Hoven, probably with tongue and both arms in cheek, posted on Obama’s seriousness with respect to budgets and spending:

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End of Government as We Have Known It

End of Government as We Have Known It

Prepare for the unimaginable.




From Zerohedge:

It’s one thing to hear fringe bloggers raving breathlessly against the collision course that the US economy is on. It is something else to see the Bank of International Settlements call for the baseline projection for US debt/GDP to hit over 400% by 2040. And this excludes the bankrupt GSEs, bankrupt Social Security, and the soon to be bankrupt Medicare. In a must read report, the BIS (of the central bankers’ central bank) provides the much needed segue to the work of Reinhart and Rogoff, and in not so many words confirms that the entire developed world is now bankrupt on a discounted basis.

Emphasis added by me from this point on.

… essentially at this point the entire world is bankrupt. Yet the bankers will keep on trending the market higher and higher on ever declining volumes, to perpetuate the illusion that things are getting better. … No matter what Obama does, no matter how he spins the CBO data, or how much healthcare reform is presented as revenue generating, the final outcome is now certain, and it involves the chain bankruptcies of every developed nation. And since the [un]developed world is merely a cheap source of commodities and processed products for the developed world, the BRICs of the world will be next.

Previously, few dared to discuss the ponzi openly. With the BIS now getting into the fray, the issue of sovereign insolvency is now front and center. Of course, few will dare to forecast when the great unravelling will begin. And neither will we, suffice to say that as more and more people read disclosure such as the above, coming from the most legitimate of financial institutions, the more people will awake to the true cataclysm that has now enveloped Western society, which if the Roman empire was any indication, is in last days.Except unlike the Roman case study, the barbarians are not at the gate: they represent 90% of the population of America itself and are already inside the gate. And they are getting angrier with each passing day.

The developed governments of the world have reached a point where default is inevitable. One only hopes we and other countries of the world get through this period with our form of government intact, avoid civil strife and shrink government in both size, responsibility and power. I am not optimistic that will happen.

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Fed Under Fire -- Throw on More Logs

Fed Under Fire -- Throw on More Logs

“The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.” President Andrew Jackson

“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.” Thomas Jefferson

Warnings about central banks are not new. Economists and statesmen recognized the dangers. The secrecy and duplicity that were involved in the formation of our Federal Reserve back in 1913 was probably the equal to the sausage-making and unpopularity of the so-called health care reform. Many books and articles have been written about the secret meeting at Jekyll Island. One even has the clever title of The Creature from Jekyll Island. A google search on “Fed Jekyll Island” will bring forth an enormous reading list.

For many, the “alternative” literature regarding the Fed was considered conspiratorial. No Money and Banking textbook has ever questioned the existence of the Fed. Innumerable students of economics were taught and blindly accepted the fact that the Fed was necessary to the smooth operations of a modern economy. The Austrian school of economics has always questioned central banking. For them, the central bank and its relationship with the banking system was the primary cause for the boom-bust cycle. These conclusions pre-dated the formation of the US Fed and are generating increasing interest as a result of the current economic crisis. For access to this literature, visit The Mises Institute.

The current economic crisis has put the Fed under a microscope. Past secrecy is being peeled back slowly and politicians and the public clamor for more. The mystique of the Federal Reserve has been tarnished. The fraudulent nature of the institution, warned about by our founders and thought to be prevented by the Constitution is becoming apparent. As a secretive organization unaccountable to voters, the Fed is increasingly under attack.  The Daily Bell concludes:

What is abundantly clear is that the powers-that-be are willing to tolerate severe joblessness and continued economic misery rather than go outside the pretend-system of money distribution. It would have been relatively easy to take a tiny percentage of the trillions distributed and provide those funds directly to the West’s industrial base. Such a precedent, which likely would have done a great deal to ease the “credit crunch” would have revealed the fiction of the current system, however.

As the Fed is slowly stripped of what clothes it has left, the picture does not get any prettier. At some point, the focus must shift from policies to the question of why we even have a Fed. That will undoubtedly lead to an investigation of the need for fractional-reserve banking, an investigation long overdue.

Unless and until both are eliminated, economies are destined to repeat crises like we are currently going through.

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