Wednesday, August 11, 2010

The U.S. in 2010: Bankrupt and Clueless

One of my favorite authors, Laurence Kotlikoff, penned an op-ed piece for Bloomberg today entitled 'U.S. is Bankrupt and We Don't Even Know It.' It pulls together published information from the IMF, CBO, and makes the case that our current national debt, unfunded future liabilities, and low growth rate combine to create a completely untenable long-term picture.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

He is also big on calculating the present value of future entitlements, net of related taxes/income, to see just how big the hole is.

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.


The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

I've read many times that the net present value of liabilities (net of projected income) was in the $60-80 trillion range, but never this high. If it helps to visualize what $202 trillion in debt represents, consider that it equals roughly $600,000 or so for every man, woman, and child in the country.

Feel better now?

Monday, August 9, 2010

College Costs: The Bubble About to Pop

Ran in to a pair of articles describing the ever-increasing costs of college as a type of bubble. It shares many of the same characteristics in terms of psychology on the part of those paying bubble prices, the use of debt, the inevitable buyers' remorse and subsequent shakeout, and so on.

Article from earlier this summer: Higher education's bubble is about to burst
College has gotten a lot more expensive. A recent Money magazine report notes: "After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. ... Normal supply and demand can't begin to explain cost increases of this magnitude."

Consumers would balk, except for two things.

First -- as with the housing bubble -- cheap and readily available credit has let people borrow to finance education. They're willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don't fully grasp just how harsh the impact of student loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

Same author, recent article: Further thoughts on the higher education bubble
Well, advice number one - good for pretty much all bubbles, in fact - is this:  Don’t go into debt. In bubbles, people borrow heavily because they expect the value of what they’re borrowing against to increase. In a booming market, it makes sense to buy a house you can’t quite afford, because it will increase in value enough to make the debt seem trivial, or at least manageable - so long as the market continues to boom.

But there’s a catch. Once the boom is over, of course, all that debt is still there, but the return thereon is much diminished. And since the boom is based on expectations, things can go south with amazing speed, once those expectations start to shift.

Right now, people are still borrowing heavily to pay the steadily increasing tuitions levied by higher education. But that borrowing is based on the expectation that students will earn enough to pay off their loans with a portion of the extra income their educations generate. Once people doubt that, the bubble will burst.

So my advice to students faced with choosing colleges (and graduate schools, and law schools) this coming year is simple: Don’t go to colleges or schools that will require you to borrow a lot of money to attend. There’s a good chance you’ll find yourself deep in debt to no purpose. And maybe you should rethink college entirely.

And here's a nice chart showing college costs versus housing and CPI courtesy of Mark Perry:

People simply wouldn't pay what they pay for college if they actually had to save and earn the money. It's all about enabling bubbles with debt.

No New Jobs in Silicon Valley

Had a brief conversation with my brother-in-law last week about the jobs created by a successful product such as Apple's iPad, etc. I was of the opinion that the actual job creation was on the order of 1000 in the U.S.A. with the vast majority being created in China (all those Apple products are made by Foxconn in China).

Read this article today by Andy Grove, co-founder of Intel, which talked about the changes in Silicon Valley and the tiny number of jobs actually created by the technology industry. Some quotes:

Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.

The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.

... and ...

The job-machine breakdown isn’t just in computers. Consider alternative energy, an emerging industry where there is plenty of innovation. Photovoltaics, for example, are a U.S. invention. Their use in home-energy applications was also pioneered by the U.S.

Last year, I decided to do my bit for energy conservation and set out to equip my house with solar power. My wife and I talked with four local solar firms. As part of our due diligence, I checked where they get their photovoltaic panels -- the key part of the system. All the panels they use come from China. A Silicon Valley company sells equipment used to manufacture photo-active films. They ship close to 10 times more machines to China than to manufacturers in the U.S., and this gap is growing. Not surprisingly, U.S. employment in the making of photovoltaic films and panels is perhaps 10,000 -- just a few percent of estimated worldwide employment.

He advocates tariffs and other "trade-war" type policies to incent companies to do more than just hire marketing people here in the U.S. and sell things designed and built overseas.

I have a hard time disagreeing with him despite my free-market leanings.

Friday, April 30, 2010

Extra! Extra! U.S. Taxpayers Bail Out Greece... And EU Banks!

When a too-big-to-fail bank (or country) fails, the powers-that-be look around for someone with money they can tap to bail them out. The EU folks looked and looked locally for someone to bail out Greece, but eventually ended up where all other good bailouts end up: In the U.S. taxpayers pockets. From PragCap:

Most Americans probably haven’t connected the dots yet, but you’re going to be signing an enormous check over to Greece over this weekend.  That’s right, as the largest contributor to the IMF the United States taxpayer is on the hook for the Greek bailout.  The numbers aren’t set in stone quite yet, but the latest rumors are for a $160B bailout over three years.  Of course, the most despicable part of this whole thing is not just the fact that the U.S. is helping to bail out Greece, but that this bailout is actually another bank bailout!  That’s right.  This isn’t really about the people of Greece.  They are going to be forced into years of austerity and painful economic times regardless of the situtation.  What this is really about is the $189B in Greek debt that the European banks have on their books.  No one wants them to take a 70% haircut on the debt.  So, connecting the dots here for you – Americans are once again bailing out banks – this time via the IMF.

They are hiding it by having the "IMF" bail them out, but that's just a smokescreen. We are the largest contributor to the IMF and will end up losing a lot of $$$ to help Greece pay for a bunch of programs and public workers that have zero benefit for us and to make whole the banks that loaned them money (unwisely).  Nice.

Got gold?

Monday, April 5, 2010

The sound of inevitability: Deficits lead to higher tax rates

Interesting chart from comparing the size and timing of deficits in the U.S. and the inevitable result: large changes in tax rates to try to stop the bleeding:

This makes TONS of sense, especially when you combine it with the government's non-stop pushing of tax-deferred accounts for retirement. People will sure feel stupid when they find themselves paying 40-50% tax rates (fed) plus some serious state taxes on 401K and IRA monies they set aside at a time when tax rates were 20-30%.

Don't feel smug if you have your money in Roth IRAs, either. I predict a means-based test for whether or not these withdrawals are truly tax-free. It's not paranoia if they're really out to get you.

Friday, April 2, 2010

Combatting the high costs of college with... Loans?!?

One of the amazing things about college costs is that they go up, year after year, faster than inflation. I suspect this is due primarily to the ever-increasing ratio of administrators to teachers, and the pension and healthcare costs associated with all these non-student-facing folks, but that's neither here nor there. The fact is that college is becoming so expensive people cannot possibly save for it or work their way through it.

So, how does the government help? Pressure schools to reduce costs (like they do with some industries)? Encourage non-traditional education or alternatives to 4-year schools? Naw... They offer to loan students money. Lots and lots of it. Take a look at this chart:

Careful, that's not a ten-year chart, that's a two-year chart.

See this blog entry for some good information on this topic.
Colleges can keep raising prices, despite the recession, because the government keeps lending students more money to pay them.
According to a report cited by Anne Marie Chaker in the Wall Street Journal on Thursday, the government will lend students $75.1 billion to pay for college this year, up a spectacular 25 percent compared with last year.
But the extra credit isn’t benefiting students. It’s just inflating the price of their education, burying them under a bigger pile of debt despite stagnant wage growth and poorer employment prospects.

And remember, student loans are not discharged in a bankruptcy. Indentured servants had it better...

Monday, March 29, 2010

Time Machine: Health Care in USA circa 2025

It's been a struggle not to pull the trigger and blog about the health-care reform law and its implications. I'm smart enough to know that I don't really know enough about the new rules to add anything to the dialog out there already, other than to remind folks that there is no free lunch. You want to cover a lot of uninsured folks, and force coverage availability (at no additional cost) for people with pre-existing conditions who wait to join a plan until they need the coverage, be prepared for premium increases that will make your head spin over the next 4-5 years. And that, of course, will lead to the ultimate end-goal of the reformers: socialized healthcare.

If I jump in my time machine and go forward about 15 years, I believe I'll find a "single-payer" healthcare system in the U.S. much like Canada has today, where health care is cheap but unavailable. Today in Canada if you want to avoid month- or year-long waitlists you pony up your own $$$ to private companies like Timely Medical Alternatives which publish a cost sheet as shown below:

Hmm. Investment opportunity? Perhaps clinics in Mexico? Stay tuned...

Thursday, March 18, 2010

Quick Link: Get Ready for Increased Taxes

In our personal lives, when expenses exceed income, we have two choices if we want to avoid debt: spend less or make more. We don't usually have the option of "making more" whenever we want, so we learn to budget, live within our means, and spend less.

The government has the same problem (in spades!) and the same two options, and it sure looks like the Obama administration is opting to increase taxes in lots of sneaky ways rather than find any real savings:
I’ve noted any number of times that government taxes comprise 14% of the national income and government spending is at 25% of the national income.  That’s as high as its been since WWII I believe.
The point, of course is there are three obvious choices here – cut spending to the income level (and beyond, really, if you plan on paying off debt) or increase taxes to the spending level (and beyond, again, if you plan on paying off the debt) or a combination of both.
Watching this current administration, it appears option two is in the works.  Lots of lip service about “unsustainable” spending, etc., but the only movement I’ve seen is legislation that increases that.  And, also, plans to increase taxes.
The health care bill is chock full of new taxes.  If you don’t believe it, review these two listings of the new taxes to be found in there.
Cap-and-trade, and now “Son of Cap-and-Trade” being sponsored by Senators Lindsey Graham and John Kerry significantly raises taxes on utilities (which means everything will cost more for consumers).

We've gotten to the point where the big-ticket spending items are off limits, taxes are being paid by a shrinking pool of people, and an entrenched government is more interested in protecting their position and power than in governing and serving. Any wonder I'm pessimistic?

Sunday, March 14, 2010

Social Security to start cashing Uncle Sam's IOUs

Well, it had to happen eventually... Social Security payments now exceed income (taxes) and it is time to start cashing in all those trust-fund IOUs.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.
Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.
Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.
Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

It's the perfect storm: Employment weak, folks "retiring" early after losing their jobs, basic demographics catching up with the Ponzi scheme. Should make for a very interesting next 5-10 years.

Friday, March 12, 2010

Non-Payers Grow to 36% Of Tax Filers

I had been wondering about the way that "credits" and income-limited deductions had been reducing the tax burden on lower-income individuals and families in recent years. It always felt like a strong "hockey stick" model in which taxes paid stayed relatively low until you reached a certain income and your taxes (as a percentage of income) suddenly exploded up. I'm not just talking about the progressive tax rates themselves -- I'm also talking about the various credits and deductions that get eliminated at different income levels.

Mark Perry has a great blog, and he recently posted the following charts from the Tax Foundation showing the percentage of filers who pay no federal taxes (now at 36%) and the income level at which you pay no taxes.

The statistic that bothers me the most is the rapid growth of non-paying filers to 51 million, or 36% of all filers. Add to that huge number the millions of non-filers and you've got an enormous block of people who (rightly? naively?) believe they can vote themselves any benefit or entitlement and will not pay a dime toward it.

At what point does the process become untenable, with a non-paying majority holding guns to the heads of the paying minority and demanding higher and higher levels of benefits? As the boomers retire, we may find out.

Wednesday, March 3, 2010

Quick Link: Bring on the Depression

One of my favorite authors (Bill Bonner) has a great column over at The Daily Reckoning.

His missive today, entitled Getting On With The Depression to Make Way For Growth, talks about the need to embrace business cycles as a way to clear the air:
Do we want a depression? Well…yes…bring it on! But not because we enjoy seeing people lose their houses and stand in bread lines. It’s only because we know that a lot of mistakes were made during the bubble years – thanks largely to the government’s mishandling of the economy. While real, underlying wealth only grew at maybe 2% per year, people spent an extra 5% to 10%. This spending gap grew during the bubble years, effectively consuming wealth that had not been earned yet…and leading to so many capital investment mistakes that there is no way to avoid a bit of backtracking – which we recognize as a depression.
Here at The Daily Reckoning, we love depression like we love mid-winter. It clears the air…and prepares the earth for spring.

Given the way elections and politics rewards short-term solutions to big problems (regardless of long-term implications), you won't hear any candidates talking about the need to let the cycle run its course. They will all fight, tooth and nail, to re-inflate some new bubble (health care spending? war spending? green energy!?) using borrowed money to show apparant progress in time to get re-elected. Bank on it.

Tuesday, March 2, 2010

Food for Thought: Govt Withholding Plummets

The government runs on taxes, and despite all the happy talk and statistics presented to the contrary, government tax receipts are dropping like a rock. This is true at the federal, state, and local level, and portends some very difficult decisions in the next 12-18 months.

From zerohedge:
February was not an auspicious start to Obama's record budget deficit-busting plans. The Daily Treasury Statement for the full month of February was just released, and it disclosed that while corporate tax withholdings, net of refunds, actually climbed marginally to $3.4 billion from $(3.4) billion in February 2009, individual tax withholdings plunged to a multi-year low of $30.7 billion. Combined, the two items also posted a multi low of $34 billion, less than the previous recent low from February 2009 when the first leg of the Greater Depression was allegedly at its zenith (see chart below). We can't wait to hear how the "recession is over" brigade will paint this particular data point.

Here's the monthly data:


And here's the trend over the past 18 months using a rolling 12-month average (to smooth variations):


The government keeps spending -- even looking for new ways to spend -- in the face of this sort of revenue trend. Deficits have nowhere to go but up, and with them, interest rates.

Tuesday, February 9, 2010

Quick Link: Learning from History

David Walker, U.S. Comptroller General from 1998 to 2008, wrote an interesting piece called What the Past Tells Us:
Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time.

How many people today could describe the fall of the great empires of the past, I wonder. Are we truly any different?
I love to read history books for the lessons they offer. After all, as the homily goes, if you don’t learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire – which included five hundred years as a republic – came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?

Think we'll last 500 years? I don't. At least not in any form our founding fathers would recognize.

Monday, February 8, 2010

Food for Thought: Total Debt to GDP Ratio

A previous post normalized government debt by GDP. If you add in private (consumer, corporate, etc) debt you get an even nastier picture:

Man, there is just nothing good you can say about a chart like that.

The fact that banks, foreign governments, and other "friendly" folks with savings are willing to continue to lend us more money when we're already in over our head should not be construed as evidence that we can actually handle the debt -- It only means that they feel we have sufficient (future) tax-levying power to pay interest on this debt (no principal, of course) for as long as it exists.

Plenty of homedebtors in the last 4-5 years found out that "qualifying" and getting a huge loan didn't mean they had the wherewithal to pay it back. They lost their downpayment and their house. What might we lose?

Quick Link: Government Deficits

RealClearMarkets - On Government Spending, America Has a Candor Gap
We have a massive candor gap, led by President Obama but also implicating most leaders of both parties. The annual budget necessarily involves a bewildering blizzard of numbers. But just a few figures capture the essence of our predicament.

First, from 2011 to 2020, the administration projects total federal spending of $45.8 trillion against taxes and receipts of $37.3 trillion. The $8.5 trillion deficit is almost a fifth of spending. In 2020, the gap is $1 trillion, again approaching a fifth: Spending is $5.7 trillion, taxes $4.7 trillion. All amounts assume a full economic recovery; all projections may be optimistic. The message: There's a huge mismatch between Americans' desire for low taxes and high government services.

That last line sums it up: We want lots of government but aren't willing to pay for it.
Second, almost $20 trillion of the $45.8 trillion of spending involves three programs -- Social Security, Medicare (health insurance for those 65 and over) and Medicaid (health insurance for the poor -- two-thirds goes to the elderly and disabled). The message: The budget is mainly a vehicle for transferring income to retirees from workers, who pay most taxes. As more baby boomers retire in the 2020s, deficits would grow.

Third, there is no way to close the massive deficits without big cuts in existing government programs or stupendous tax increases. Suppose we decided to cover all future deficits by raising taxes. Taxes would rise in the 2020s by roughly 50 percent from the average 1970-2009 tax burden.

Clearly unsustainable...

Saturday, January 16, 2010

Food for Thought: Debt to GDP Ratio

Politicians are very good at spending other people's money. Heck, we're all good at that! Give me a Best Buy gift card for Christmas and I suddenly need something from Best Buy!

Despite what politicians think about deficits, they do actually matter. Or at least, they matter when they all get added up and turned into debt someone else needs to service or -- shudder -- pay back. Okay, yea, you can stop laughing over that last bit. It's been a loooong time since any of the federal debt actually got paid back (don't get me started on using SS trust fund surpluses to make the general fund deficits look smaller).

It can be dangerous to just look at debt levels without normalizing by something. Usually the federal debt is normalized (divided by) the U.S. Gross Domestic Product (GDP) yielding a chart of the debt something like this:

The optimist looks at this chart and says "See, it's been higher before, what are you so worried about?"

The pessimist notes a couple of things:
  • GDP includes all goods and services produced or consumed in the country in a given year. Given that large deficits allow consumption way beyond the natural level, and we are consuming much more than we produce these days, it's not hard to get a little worried that normalizing debt with debt-driven consumption (rather than true production and income-producing activity) doesn't yield much happy factor.
  • The previous peak was during a World War: Fighting for survival, all young men to the front, buy war bonds, that sort of thing. This peak (and it hasn't peaked yet, not by a long shot) is a year or two into a recession following an long period of peace and prosperity (fueled by debt, but prosperity nevertheless).
Color me pessimistic. I see the federal debt with nowhere to go but up. I ran in to this chart the other day. Seems pretty optimistic to take a clearly accelerating up trend in debt/GDP and suddenly flatten it for 8 years!

In a future post I'll talk about what countries do when their debt becomes impossible to service.

Thursday, January 14, 2010

It's All Good! ... Right?

I hear that phrase, "It's All Good," from a lot of younger folks these days. I'm not sure where it comes from, but it occurs to me that its use -- and overuse -- might be a symptom of something unhealthy in our society and the way it admits and deals with problems. So, for a first real post on my newly-christened blog, I thought I would start to explore some of the reasons I cannot share in the confidence inherent in the phrase "It's All Good" when it comes to our economy, our freedoms, and our future.

I'm worried. Scared, even. From where I sit, knowing what I know and believing what I believe, I don't think things are "good" now, nor do I believe they are getting better.

Perhaps I've spent too much time read James Kunstler and his post-apocalyptic view of society in a decade or so if we don't face up to, address, and solve some really big basic problems (Peak Oil, poor city planning, etc). Perhaps I've read (and understand) too many posts by the folks at zero hedge railing on the lack of regulatory oversight and the incredible power Goldman Sachs (aka the vampire squids) have over our legislative and executive process. Perhaps I actually understand the role of incentives and moral hazard in causing people to act the way they do, and how continuing bailouts of firms who bet badly simply encourages them (and others) to make different, but equally bad, bets. (Heck, the folks involved get paid their bonuses based on the number and size of their bets without needing to wait to see how they work out! Good work if you can find it...) Whatever it is, I don't see it as All Good or Mostly Good or even Bad But Getting Better. I see it as Bad and Getting Worse.

Wednesday, January 13, 2010

Once more into the breach...


I've decided to try blogging again after a seven-year hiatus. The last time I blogged it was a technology blog for BEA in conjunction with the publishing of my first WebLogic Server book, Mastering WebLogic Server, in 2003.

Unfortunately, I'm not the technology-chasing type, and my typical advice to people consisted of gems like "stick with what you know," "don't upgrade without a compelling reason," and "avoid using new frameworks or tools for at least 2-3 years." This didn't really jive with the needs of a vendor-sponsored technology blog. Go figure.

This time around I'm going to blog about the topics that interest me: Economics, finances, politics, religion, and perhaps a few others. I may also sneak in an entry or two concerning the design and development of Java enterprise applications, but don't hold your breath.

Why did I choose such a strange name for the blog? You'll just have to "stay tuned" and find out.