US Economy

[a_majoor]

Heh

 

[a_majoor]

Oh look, the root causetm. Cue the chirping crickets for the American and Canadian MSM:

Media Still Covering Up The $400 Billion Fannie And Freddie Scandal (FNM, FRE)
Joe Weisenthal|May. 8, 2009, 3:39 PM|comment29

This morning, Fannie Mae (FNM) announced that it had lost another $23 billion in the quarter, and would have to call down $19 billion more in taxpayer support. It also said that it would face losses as far as the eye can see.

Do you know how much we've committed to backstopping Fannie and its partner-in-crime Freddie Mac (FRE)? $400 BILLION! Back in February that was doubled from the original $200 billion.

But the news of the quarterly loss is getting hardly any attention. Nothing here at the NYT business section, for example. Nothing at the blogs that were going nuts when AIG was revealed to have paid out bonuses back in March.

The problem is that the Fannie and Freddie disasters don't fit into any conventional media narrative. At AIG you had Joe Cassano, lurking in the shadows, turning AIGFP into his own personal casino, while taking home gargantuan pay.

Fannie Mae? They help nice families get into homes. Their motto is something about helping the people who help house America. Who could be against that? Plus, the Fannie and Freddy story doesn't help explain the idea that laissez-faire deregulation is what allowed Wall Street to go crazy. Fannie and Freddy had their own freakin' regulator, OFHEO. Two companies with one regulator to look into both of them.

And then you have all the Democrats on the inside (Rahm Emanuel, for example) on the outside (Barney Frank), who have ties to the company's worst years.

If AIG (AIG) ever has to ask for one more dollar to pay counterparties like Goldman Sachs (cue the ominous music!), there'll be a fresh round of media outrage. Fannie and Freddie continue to blow through cash though, and it goes without a peep, depriving the public insight into one of the more important aspects of the housing bubble and the crisis.

 

[a_majoor]

Trouble down the road? Trouble right now

http://meganmcardle.theatlantic.com/archives/2009/05/the_risk_of_debt.php

The Risk of Debt
12 May 2009 07:55 am

So why should we worry about the ability of the government to borrow?  For the past decade, at least, the American government has been able to borrow pretty much all the money it wanted without seeming to pay much of a price in terms of higher interest rates.  Bush's deficits were worrying in a number of ways, but they certainly didn't crowd out private investments, and we got a good deal on the money.

But Obama's spending plans are extraordinarily ambitious.  His projected deficits for the rest of his possibly presidency are higher than the "runaway" deficits that plagued most of the Bush administration--and after the first few years, that's not stimulus, that's ordinary spending outstripping revenue.  For a while now, I've been asking people at conferences, on and off the record, what America's sovereign debt risk is?  That is, how long until people stop treating treasuries as the "risk free" securities, and start demanding a premium for the risk that we might default.

The answer from the right has been a nervous (perhaps hopeful) 2-3 years.  The answer from the left, and professional Democratic wonks, is some unspecified time in the future.  Probably, there will be a Republican in charge.  Markets hate Republicans.

But last Thursday, the Treasury auction was . . . well, descriptions vary from "weak" to "horrible".  This raises the unpleasant possibility that markets are, as my business school professors insisted, "forward looking".  Voters may believe that getting a bunch of special interests to agree in principal that costs should be cut is the same thing as actually cutting costs.  Bond markets don't.  That's why James Carville famously wanted to be reincarnated as the bond markets so he could "intimidate everyone".

But the problems faced by Clinton were modest--moderately higher interest rates, possibly, for ordinary borrowers.  The Obama administration is trying to borrow 13% of GDP this year.  If bond markets think future deficits are a problem, they can rapidly push up rates to the point where that borrowing becomes unaffordable.  And if they do, it will be clear that they are pricing in that ugly, ugly CBO graph:



Obama can assure voters that he inherited these deficits.  But bond markets pay closer attention to the fact that Obama has already increased the projected deficit he inherited by 50%:


The White House raised the 2009 budget deficit projection to a staggering $1.8 trillion today. For context, it took President Bush more than seven years to accumulate $1.8 trillion in debt. It also means that 45 cents of every dollar Washington spends this year will be borrowed.

President Obama continues to distance himself from this "inherited" budget deficit. But the day he was inaugurated, the 2009 deficit was forecast at $1.2 trillion -- meaning $600 billion has already been added during his four-month presidency (an amount that, by itself, would exceed all 2001-07 annual budget deficits). And should the president really be allowed to distance himself from the $1.2 trillion "inherited" portion of the deficit, given that as a senator he supported nearly all policies and bailouts that created it?

The president also talks of cutting the deficit in half from this bloated level. But even after the recession ends and the troops return home, he'd still run $1 trillion deficits -- compared to President Bush's $162 billion pre-recession deficit. In other words, the structural budget deficit (which excludes the impacts of booms/recessions) would more than quintuple.


Obama's spending is not the only reason the deficits are so big--not by a long shot.  But he is using the sticker shock to slide in big spending plans without paying for them.  And while the US can certainly afford one $1.4 trillion year, it probably cannot afford 10 $600+ billion years.  As private credit markets recover, government credit markets will start to reflect that reality.

That's not to say that disaster is at hand.  Obviously, I am not fond of all the new spending plans, so I (and you) should be mindful of a possible tendency towards wishful thinking.  And this is early days--sometimes a bad bond auction is just a bad bond auction.  But I imagine that Larry Summers had at least one sleepless night.

 

[tomahawk6]

I hope no one buys Treasuries. It would be insane with the Obama budget deficit of $1.8 trillion to buy any US debt and the economy as it comes under government control will not be creating much wealth. Bad news in the long run.

 

[a_majoor]

Joining the John Galt strike (from the comments section):

http://insidetheasylum.blogsome.com/2009/05/13/wisdom-that-confucius-taught-part-2/

Your government is taking the tax dollars you are paying and giving them to GM. It is also laundering your tax dollars through AIG to send billion-dollar checks to millionaire foreign bankers in Germany and Switzerland. This is not sustainable.

Going Galt isn’t easy, but you can make a contribution in small, unexpected ways:

1) Defer your income - If you are already very well off, and you can afford to have your employer defer your income to a future year then try to DEFER YOUR INCOME. Work for free now and pay no income tax while they are in office, with the promise that you’ll get income down the road after they’ve been defeated. Then, make it clear to the government that you will continue to defer your income until the stolen money is returned to its rightful owners – US taxpayers.

2) Have your wife (or you) re-engage your children: Most spouses work for very little money by the time you pay for the child care expenses, plus the taxes on the second income, plus the additional taxes you pay on the first income because the second income pushes you into a higher tax bracket. RUN THE NUMBERS - you’ll be surprised just how very little your second wage-earner is actually making while someone else is raising your children poorly. QUIT THE SECOND JOB. Forgo that income. Defy Obama. Take back the tax dollars on that income and instead, invest it in your children’s future by raising them yourselves. Obama will turn blue with rage.

3) Stop spending! Unnecessary spending means you are paying unnecessary sales taxes. Sadly, most of the consumer products you are buying are made in China. Every dollar you spend on such items is shipped out of your country. So, STOP SHOPPING, especially at Wal-Mart, China’s preferred importer. All you are doing is creating sweatshops in Communist China and unemployment here at home. The side benefit is that you deprive badly run bloated state governments of sales tax revenue – and that’s half the fun of it.

4) Keep your cash income at home! It’s just a good idea to have a few thousand dollars at home anyway for emergencies. Banks are teetering on the brink. Do you want to get caught holding the bag? Get a fire safe for several hundred dollars and put away a few thousand dollars. Remember: What they can’t find, they can’t tax and they can’t redistribute.

5) Work for cash if you can. Treasury Secretary Tim Geithner had it right: Cash income is frequently not taxed. Keep that cash at home, then spend it on everyday expenses, like our Treasury Secretary did for years and years and years. It’s how he became a millionaire. He knows the ins and outs. Follow his lead.

Going Galt doesn’t mean quitting your job and putting your family in jeopardy. It means depriving the government of your services in every way possible that you can without putting your family in jeopardy, while at the same time being very vocal about why you’re doing it.

Finally, there’s one final step: VOTE ALL OF THEM OUT. Republicans and Democrats alike. Our current leaders got us into this mess. It’s time to get them out.

Comment by jgalt — May 14, 2009 @ 7:05 am

 

[a_majoor]

The day of recconing may be much closer than we all think:

http://meganmcardle.theatlantic.com/archives/2009/05/is_california_too_big_to_fail.php

Is California Too Big to Fail?
19 May 2009 05:48 pm

So what about California?  A reader asks.  Ummm, that's a tough one.  No, wait, it's not:  California is completely, totally, irreparably hosed.  And not a little garden hose.  More like this.  Their outflow is bigger than their inflow.  You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money that comes in during the booms, borrow some more, and then act all surprised when revenues, in a totally unprecedented, inexplicable, and unforeseaable chain of events, fall during a recession.  You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets.  Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!

There is a surprisingly sizeable blogger contingent arguing that we have to bail them out because however regrettable the events that lead here, we now have no choice.  But actually, we do have a choice:  we could let them go bankrupt.  And we probably should.

I am not under the illusion that this will be fun.  For starters, the rest of you sitting smugly out there in your snug homes, preparing to enjoy the spectacle, should prepare to enjoy the higher taxes you're going to pay as a result.  Your states and municipalities will pay higher interest on their bonds if California is allowed to default.  Also, the default is going to result in a great deal of personal misery, more than a little of which is going to end up on the books of Federal unemployment insurance and other such programs.

Then there are the actual people involved.  Whatever you think of, say, children who decided to be born poor, right now they are dependent on government programs, and will be put in danger if those programs are interrupted.

On the other hand, I don't really see another way out of it.  If Uncle Sugar bails out California, California will not fix its problems.  Perhaps you want Obama to make it fix the problems, using the same competence, power, and can-do spirit with which he has repaired all the holes in the banking and auto manufacturing sectors.  But Obma is not in a good position to do this.  California Democrats are a huge part of his governing coalition.  All Obama can do is shovel money into the bottomless pit of California's political system.

Moreover, even if the administration could fix any of the core problems of California--and New York--and the banks--and the automakers--and the energy industry--they can't fix them all.  Especially given how thinly staffed Treasury is.  The president and his cabinet only have so much attention, more than all of which seems to be occupied by the problems already on their plate.  They don't really have the time, knowledge, energy, or staff to take on running a whole 'nother government.

California will go bankrupt, muni and state debt will spike, the federal government will backstop humanitarian programs and very possibly all state and local debt, and eventually, California will figure out whether it wants higher taxes or lower spending.  But we will not actually make the world a better place by enabling the lunatics in Sacramento to pretend they can have both.

And New York (State) si prety close to the edge as well. Several other States are also in serious trouble, but as one comment points out these are all politically controlled by the Democratic Party, which indicates the Admininstration *will* commit to bailing them out with superinflationary new spending to maintain control of the Congress and White House.

The magic question is how many states can the Feds bail out? - NY, IL, MA, NJ, RI, MI are all on the edge and most likely going to fail. Funny how every one of them is virtually 100% democratically controlled. There is also the massive sucking sound as the wealthy flee these high tax states for low tax states, bringing businesses and job creation with them. Funny how when you target the rich they move. The second magic question is how long till they flee the USA?

Canada could capitalize on this by dramatically lowering taxes (rather than spending more on ill conceived "Stimulus") and attracting these people. The John Galt effect of productive people leaving will force the collapse anyway, let's be in a position to ride it out in style and recover quickly using the pool of skilled and talented Americans we have attracted.

 

[a_majoor]

Negative interest rates to combat deflation?

http://american.com/archive/2009/may-2009/why-not-negative-interest-rates

Why Not Negative Interest Rates?

By Alex J. Pollock Thursday, May 21, 2009

Could we have negative nominal interest rates to combat a potential deflation? The question is debated from time to time, especially recently. It may seem unlikely, but it is not impossible.

John Makin’s April Economic Outlook observed that with the theoretically right monetary policy for present economic circumstances, the fed funds rate would be significantly negative. However, we run up against the famous “zero bound” thesis for interest rates—that it is impossible for them to be below zero.

This is frequently stated, but is it true? Why could we not have negative nominal interest rates to combat a potential deflation? This natural question arises and gets debated from time to time over the years among financial and monetary thinkers. In recent weeks, Greg Mankiw (“It May Be Time for the Fed to Go Negative”) and Willem Buiter (“Negative Interest Rates: When Are They Coming to a Central Bank Near You?”) have raised it again. Says Buiter, “I agree with Greg Mankiw that it is time for central banks to stop pretending that zero is the floor for nominal interest rates.”

In fact, there are some historical examples of negative interest rates.

“From early August to mid-November of 2003, negative interest rates occurred on certain U.S. Treasury repurchase agreements,” according to economists Michael Fleming and Kenneth Garbade. “This episode refutes the popular assumption that interest rates cannot go below zero,” they say.

Daniel Thornton reported in 1999 in a St. Louis Federal Reserve note that “several foreign-owned banks in Japan have paid negative nominal interest rates on yen deposits.”

    One of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40.

In 1972, the Swiss central bank imposed negative interest rates on Swiss franc deposits by foreigners. This was to reduce the flow of money into Swiss francs, which was driving up the foreign exchange value of the currency against the central bank’s desires. The charge was up to 10 percent per quarter, or 40 percent per annum—negative interest rates with a vengeance! They were again imposed, for the same reason, from 1977 to 1979.

Further back, Sidney Homer’s classic, A History of Interest Rates, reports that Treasury bill rates were sometimes negative in 1940 and 1941. “Treasury bill yields were sometimes quoted at 0.001% and occasionally sold at negative yields,” Homer wrote, “because they were exempt from the personal property taxes of some states.” In other words, the personal property tax created effective negative yields on other assets, allowing actual negative yields on Treasury bills.

It might be argued that these instances are special cases. Suppose we wish to discourage the holding of cash or Treasury bills in general, and to encourage investors to spend or invest instead—could it be done by creating negative interest rates more broadly?

The classic argument is that the possibility of simply switching to paper currency, which by definition circulates at par (a zero interest rate), is what makes a generalized negative interest rate on deposits or securities impossible. As Buiter says about creating negative interest rates, “Currency is the only problem.” We will return to the problem of currency in a moment.

But let’s begin with Treasury bills. Imagine a financial panic, when everybody wants to own Treasury bills, no matter what the yield. Now along comes the Fed, with its infinitely expandable balance sheet, and bids for 90-day bills until their price reaches 100.5, for example, or 101. Their interest rate is now about negative 2 percent or 4 percent.

    A negative interest rate on excess reserves would result in a disincentive to hold Fed deposits, which would increase the banks’ incentive for the funds to be put out in the interbank market or the commercial paper market or in loans instead.

How would banks respond? There would be no point in buying Treasury bills if they could simply hold excess reserves at the Fed instead. This is the banking equivalent of putting banknotes in the mattress: “Many banks prefer to hoard cash,” is a recent analyst’s comment. Indeed, one of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40: from $21 billion to $860 billion.

But it would be straightforward for the Fed to put a negative interest rate on these excess reserves, just as the Swiss did on foreign deposits. The resulting disincentive to hold Fed deposits would increase the banks’ incentive for the funds to be put out in the interbank market or the commercial paper market or in loans instead—yes, that’s the idea.

Could the banks in turn put negative interest rates on customers’ deposits with them? They might not have to if they were doing something with the money besides holding risk-free assets, but in principle they could. Something similar is done by charging fees on demand deposits.

It looks like the depository system could conceptually include negative interest rates. But how about if everybody just took out currency instead? Would this not defeat the whole idea? Such discussions always arrive at this objection.

This leads to various more or less cumbersome and impractical schemes for imposing costs on holding currency to take away its advantage in a world of negative interest rates on deposits. A classic one is to require tax stamps to be put on banknotes periodically. But are these necessary for the negative interest rate idea?

It is easy to imagine converting deposits to cash for very little cost and risk if we are thinking about relatively small amounts and personal transactions. But dealing with very large amounts of cash in commercial transactions entails very large costs and risks. Would negative interest rates induce a company with 200,000 employees, for example, to stop its automatic payroll deposit system and start passing out envelopes full of cash instead? Would the Social Security Administration start mailing its pensioners similar envelopes? Obviously not. And the Fed could put hefty charges on banks taking more than a standard level of currency from it.

Moreover, there is simply not nearly enough existing currency to replace all deposits. Even if the government did not go as far as abolishing currency (one suggestion), it could refuse to increase the supply. What then? Some hoarding of currency would result, reducing the available supply further, and then currency would presumably go to a premium against deposits. You could still make all the payments you need to, but you could either bear your negative interest rate by holding deposit cash, or have to pay a premium if you insisted on banknote cash. Or you might buy gold. Or you might spend it or make some investments in bonds or stocks or a house—again, that’s the idea.

    The increasing dependence on electronic payments makes a massive move to currency less feasible and thus negative interest rates more plausible.

Would anybody rationally pay $1.02 for $1.00 in cash? They do today, if they take cash as a non-customer from an ATM. The average ATM surcharge fee is about $2. For a $100 withdrawal, that is equivalent to a price of $1.02. Alternately thought of, if a $200 withdrawal were cash for one month, the average fee would be equivalent to a negative 12% interest rate.

In general, the increasing dependence on electronic payments makes a massive move to currency less feasible and thus negative interest rates more plausible.

Still, one can imagine the unhappy customers being informed they could not withdraw currency from a human teller at par. And one can consider what the political reaction to such effects of negative interest rates might be.

In sum, could negative interest rates “come to a central bank near you”? It may seem unlikely, but it is not impossible.

 

[a_majoor]

Mark Styen on the shape of the "new economy":

http://article.nationalreview.com/print/?q=MWUyM2QwYzhkMTc5MmQ3M2QyZGMzYjZhZWM0ZTMzOWE=

What Are We Stimulating?
The stimulus will do nothing for the economy, but it will advance the cause of statism.

By Mark Steyn

I was in Vermont the other day and made the mistake of picking up the local paper. Impressively, it contained a quarter-page ad, a rare sight these days. The rest of the page was made up by in-house promotions for the advertising department’s special offer on yard-sale announcements, etc. But the one real advertisement was from something called SEVCA. SEVCA is a “non-profit agency,” just like the New York Times, General Motors, and the State of California. And it stands for “South-Eastern Vermont Community Action.”

Why, they’re “community organizers,” just like the president! The designated “anti-poverty agency” is taking out quarter-page ads in every local paper is because they’re “seeking applicants for several positions funded in full or part by the American Recovery & Reinvestment Act (ARRA)” — that’s the “stimulus” to you and me. Isn’t it great to see those bazillions of stimulus dollars already out there stimulating the economy? Creating lots of new jobs at SEVCA, in order to fulfill the president’s promise to “create or keep” 2.5 million jobs. At SEVCA, he’s not just keeping all the existing ones, but creating new ones, too. Of the eight new positions advertised, the first is:

“ARRA Projects Coordinator.”

Gotcha. So the first new job created by the stimulus is a job “coordinating” other programs funded by the stimulus. What’s next?

“Grantwriter.”

That’s how they spell it. Like in Star Wars — Luke Grantwriter waving his hope saber as instructed by his mentor Obi-Bam Baracki (“May the Funds be with you!”). The Grantwriter will be responsible for writing grant applications “to augment ARRA funds.” So the second new job created by stimulus funding funds someone to petition for additional funding for projects funded by the stimulus.

The third job is a “Marketing Specialist” to increase “public awareness of ARRA-funded services.” Rural Vermont’s economy is set for a serious big-time boom: The critical stimulus-promotion industry, stimulus-coordination industry, and stimulus-supplementary-funding industry are growing at an unprecedented rate. The way things are going we’ll soon need a Stimulus-Coordination Industry Task Force and Impact Study Group. By the way, these jobs aren’t for everyone. “Knowledge of ARRA” is required. So if, say, you’re the average United States senator who voted for ARRA without bothering to read it, you’re not qualified for a job as an ARRA Grantwriter.

I don’t want to give the impression that every job funded by the stimulus is a job coordinating the public awareness of programs for grant applications to coordinate the funding of public awareness coordination programs funded by the stimulus. SEVCA is also advertising for a “Job Readiness Program Coordinator.” This is a job coordinating the program that gets people ready to get a job. For example, it occurred to me, after reading the ad, that I might like to be a “Job Readiness Program Coordinator.” But am I ready for it? Increasing numbers of us are hopelessly unready for jobs. Ever since last November, many Americans have been ready for free health care, free daycare, free college, free mortgages — and, once you get a taste for that, it’s hardly surprising you’re not ready for gainful employment. I only hope there are enough qualified “Job Readiness Program Coordinators” out there, and that they don’t have to initiate a Job Readiness Program Coordinator Readiness Program. As the old novelty song once wondered, “Who Takes Care of the Caretaker’s Daughter While the Caretaker’s Busy Taking Care?” Who coordinates programs for the Job Readiness Program Coordinator while the Job Readiness Program Coordinator’s busy readying for his job? If you hum it, I’ll put in for the stimulus funding.

Oh, and let’s not forget the new job of “VITA Program Coordinator.” VITA? That’s “Volunteer Income Tax Assistance.” It’s an IRS program designed “to help low and moderate-income taxpayers complete their tax returns at no cost.” The words “no cost,” by the way, are used in the new Webster’s–defined sense of “massive public expenditure.” Whoops, I mean massive public “investment.” You might think, were you a space alien recently landed from Planet Zongo, that, if tax returns are so complicated that “low and moderate-income taxpayers” have difficulty filling them in, the obvious solution would be to make the tax code less complex. But that’s just the unfamiliar atmosphere on Planet Earth making you lighthearted and prone to cockamamie out-of-this-world fancies. Put in for a Job Readiness Program, and you’ll soon get with the program.

Of course, it’s not just “low and moderate-income taxpayers” who have difficulty completing their tax returns. So do high-income taxpayers like Treasury secretary Timothy Geithner. Tragically, they’re ineligible for the “Volunteer Income Tax Assistance” program. Indeed, the Treasury secretary seemed under the misapprehension that it was a “Volunteer Income Tax” program, which would be a much better idea. But, being ineligible for VITA, Secretary Geithner was forced to splash out $49.95 for TurboTax and, simply by accidentally checking the “No” box instead of “Yes” at selected moments, was able to save himself thousands of dollars in confiscatory taxation! Oops, my mistake, I meant that, tragically, by being unable to complete his tax return due to a lack of Volunteer Income Tax Assistance, Timothy Geithner was the only one of 300 million Americans to pass the Treasury Secretary Job Readiness Program.

SEVCA serves two rural counties with a combined total of a little over 40,000 households. If you wanted to stimulate the economy, you’d take every dime allocated to Windsor and Windham counties under ARRA and divide it between those households. But, if you want to stimulate bureaucracy, dependency, and the metastasization of approved quasi-governmental interest-group monopolies as the defining features of American life, then ARRA is the way to go. Oh, you scoff: ARRA, go on, you’re only joking. I wish I were. We’re spending trillions we don’t have to create government programs to coordinate the application for funds to create more programs to spend even more trillions we don’t have.

The stimulus will do nothing for the economy, but it will dramatically advance the cause of statism (as Mark Levin rightly calls it). Last week’s vote in California is a snapshot of where this leads: The gangster regime in Sacramento is an alliance between a corrupt and/or craven political class wholly owned by a public-sector union-bureaucracy extortion racket. So what if the formerly Golden State goes belly up? They’ll pass the buck to Washington, and those of us in non-profligate jurisdictions will get stuck with the tab. At some point, the dwindling band of citizens still foolish enough to earn a living by making things, selling things, or providing services other than government-funded program coordination will have to vote against not just taxes but specific agencies and programs — hundreds and thousands of them.

The bad news is our children will not enjoy the American Dream. The good news is they’ll be able to apply for an American Dream Readiness Assistance Coordination Grantwriter Program. May the Funds be with you!


— Mark Steyn, a National Review columnist, is author of America Alone. © 2009 Mark Steyn

 

[a_majoor]

Obamanomics meets the real world:

http://online.wsj.com/article/SB124329282377252471.html#

Millionaires Go Missing
Maryland's fleeced taxpayers fight back.

Here's a two-minute drill in soak-the-rich economics:

Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).

The Maryland state revenue office says it's "way too early" to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It's easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: "Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it's easy for them to change their residency."

All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's "fair share."

Printed in The Wall Street Journal, page A18

 

[a_majoor]

The window for widespread economic disruption is probably a bit wider than a decade. Social Security and Medicare will become insolvent by 2016/2017, but in the mean time we have this admininstrations epic deficits, plus the financial instability of "Blue" states and the trillion dollar underfunded public service pensions debt bombs lurking in the background. Economic recovery is being retarded by the flood of debt absorbing potential investment resources, so paying this down does not seem to be a realistic option anymore (if it ever was the plan....)

The market has another card to play in terms of applying fiscal dicipline to the political class, however. It remains to be seen how well it can work:

The Bond Vigilantes
The disciplanarians of U.S. policy makers return.
 
They're back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.

Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong, as long as investors were looking for the safest financial port amid the post-September panic. But as risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.

They have cause to be worried, given Washington's astonishing bet on fiscal and monetary reflation. The Obama Administration's epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two or three years alone. Meanwhile, the Fed has gone beyond cutting rates to directly purchasing such financial assets as mortgage-backed securities, as well as directly monetizing federal debt by buying Treasurys for the first time in half a century. No wonder the Chinese and other dollar asset holders are nervous. They wonder -- as do we -- whether the unspoken Beltway strategy is to pay off this debt by inflating away its value.

The surge in the 10-year note is especially notable because its rate helps to determine mortgage lending rates. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars more in this effort. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher. It's not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.

Printed in The Wall Street Journal, page A14

 

[a_majoor]

Here is a good "out" for the Federal Finance Minister to cancel our "Stimulus" package. Since the Canadian economy is now apparently recovering, the second (and perhaps more politically expedient) "out" also exists; stimulus doesn't work and it isn't needed:

http://www.thepolitic.com/archives/2009/06/08/suprise-suprise-the-us-fiscal-stimulus-is-a-failure/

Suprise Suprise, the US Fiscal Stimulus is a Failure
June 8, 2009 · By Greg Farries

Dick Morris points out a sobering truth about the failure of “stimulus” economics:
Here are the details. In April, personal household, inflation-adjusted income rose by $122 billion. Of that increase, one-third or $44 billion came from the government’s stimulus program. But while personal income was rising, household savings (which includes paying down credit card balances, mortgages, student loans, car loans, etc) rose by $132 billion — $10 billion more than the rise in income. So personal consumption dropped 0.1%.

The stimulus package was a total and complete failure. As predicted, as happened with Bush’s 2008 tax cut, as happened with the Japanese stimulus packages of the 90s, fearful consumers sat on their money and wouldn’t spend it. Keynesian economics didn’t work. Again.

The economic situation in Canada is not likely to be much better.

John H. Cochrane writing at the economist.com:

There is little empirical evidence to suggest that stimulus will work either. Empirical work without a plausible mechanism is always suspect, and work here suffers desperately from the correlation problem. Quack medicine seems to work, because people take it when they are sick. We do know three things. First, countries that borrow a lot and spend a lot do not grow quickly. Second, we have had credit crunches periodically for centuries, and most have passed quickly without stimulus. Whether the long duration of the great depression was caused or helped by stimulus is still hotly debated. Third, many crises have been precipitated by too much government borrowing.

 

[Edward Campbell]

Globe and Mail columnist Jeffrey Simpson is captive to a 1950s and ‘60s (Keynesian) view of economics – one which overvalues unionized metal bending jobs and, seriously, misunderstands both the ideas of a service economy and of supply side economics. But, that being said, his views are, pretty much, in the mainstream – as defined by our national political and opinion leaders, Simpson being one of the latter. Here is his latest, reproduced under the Fair Dealing provisions (§29) of the Copyright Act, from today’s Globe and Mail:

(Ignore most of the 2nd through 7th paragraphs; they are the usual inane rantings of the Toronto intelligentsia and Simpson is incapable of not barking them, à la Pavlov’s dogs, to guarantee his place in the Parthenon of the stupid.)

http://www.theglobeandmail.com/news/opinions/on-the-economy-americas-choices-arent-pretty/article1180752/

On the economy, America's choices aren't pretty
Barack Obama has no more important obligation than a serious discussion of how and when

Jeffrey Simpson

Friday, Jun. 12, 2009

The epicentre of the world economic meltdown was, and remains, the United States. No serious recovery can occur, in Canada or anywhere else, until that country grapples with its fundamental problem: that it has spent, and continues to spend, way beyond its means.

The U.S. political system, and the political culture that surrounds it, has failed for decades to come to grips with this reality. Instead, the country has been paralyzed by myths about its invincibility, the superiority of its institutions and the sterility of demonstrably false ideology. Every major U.S. institution has let down the country; or perhaps leaders of those institutions simply reflected the country wanted to hear.

George W. Bush's presidency was a catastrophe, which makes it all the more bizarre why people in Toronto and Calgary would shell out money to hear him. He left the country with large deficits, among other liabilities, courtesy of higher spending and tax cuts.

The Congress, under Democrats and Republicans, proved incapable of curbing spending or raising taxes, or of coming to grips with Social Security or health-care.

The Federal Reserve, under Alan Greenspan, did not speak out against fiscal excess, sanctioned high growth based on borrowing and inadequately regulated markets.

The Republican Party, the dominant party for the past quarter-century, abandoned its previous commitment to balance and prudence. It fell in love with supply-side economics, which produced 20 consecutive years of federal deficits with Republicans in the White House, starting with the irresponsible fiscal dreamer, Ronald Reagan.

That ideology still holds Republicans in its sway.

Many have been the results of these failures, but the most unsettling has been the chronic unwillingness of Americans to tax themselves at rates commensurate with what they spent.

There is therefore no more important obligation for President Barack Obama than to engage his fellow citizens in a serious discussion of how and when balance must be restored, which means, in part, raising taxes.

Unless Americans understand that balance must be restored - that the deficits and debt cannot continue - then the U.S. economic position in the world will continue to weaken.

The President understands this challenge, because he has spoken about it. But in the midst of the worst economic downturn since the 1930s, his discourse about the imbalances has been sotto voce. Soon, however, it must become one of his most urgent narrative lines.

Where is the United States?

Start with the long term. For the third consecutive year, the trustees of Social Security and Medicare (the health-care plan for seniors) recently issued a “Medicare Funding Warning,” the equivalent of flashing red lights, saying the fund would be close to being broke by 2017. Social Security needs an immediate 16-per-cent increase in the payroll tax or a 13-per-cent reduction in benefits, or some combination of the two, to remain solvent. Otherwise, outlays will begin to exceed intake by 2016 and the fund will be gone by 2037. Rectifying both programs will cost huge sums.

To these programs, Mr. Obama is proposing extending health care to the 46 million Americans without it. Insuring them by some estimates will cost $1.5-trillion over the next decade. One source of new funding for health care was supposed to come from auctioning carbon permits, but the House bill on climate change proposes giving 85 per cent of the permits away for free. So where does the money come from?

On the energy front, the United States has been a net oil importer since 1970. Sixty per cent of its oil comes from offshore. One-eighth of the world's entire oil supply is consumed by U.S. private vehicles. With world oil prices almost certainly heading up in the years ahead, the U.S. bill for imported oil will rise - presuming there are no wrenching changes to consumption patterns.

The U.S. trade deficit is long-standing and very large - another example of consumption surpassing production. The result has been the massive borrowing that has characterized contemporary America - borrowing by consumers, companies and governments. The deficit also contributes to strong protectionist sentiments, the full force of which the world, including Canada - think Buy America - has not yet seen.

The borrowing, in turn, created the huge financial imbalances between the debtor country, the United States, and its major creditor, China, a relationship that is daily changing incrementally the balances of power in the world.

Fiscally, the United States is a disaster. The Congressional Budget Office predicted in March a deficit in 2009 of $1.8-trillion and in 2010 of $1.4-trillion, and in 2011 of almost $1-trillion, with deficits of $650-billion to $1-trillion each year to 2019.

The resulting debt buildup, if the CBO is correct, would be almost unimaginable. Resumption of economic growth alone could not possibility cover these staggering gaps, without even thinking of the soaring bill for social programs and oil.

Choices? Default: unimaginable. Raise taxes: indispensable but difficult. Cut spending: easier said than done. Inflate: it's already started and will continue.

There is, of course, an intuitively obvious choice for Obama that Simpson fails to mention: cut spending.

No, not on social security and not on medical system reform, either: both are, actually, “good” expenditures and, certainly, not on R&D and education, both of which are amongst the “best” expenditures.

Where is money wasted?

Security and defence, for a start: I would wager that homeland security would improve if the whole department was dismantled and the budgets of the bits and pieces that survived were cut by, say, ⅓. A 15% cut to the pentagon’s budget might, finally, introduce some fiscal and planning discipline where none has been evident since the end of the 1950s. Related to security: immigration; the border with Mexico should be sealed, quickly and thoroughly then all 10-15 million illegal (but highly productive) gastarbeiters should be (very) fast-tracked to full, taxpaying citizenship. A huge saving, but probably, political suicide would be found by stopping the illegal improper subsidies to various special interests, starting with agriculture and extending through forestry and other sunset industries – like metal bending.

But, Simpson has hit on the main point: Americans and America  are living beyond their means. The culture of entitlement is not unique to Canada or Europe. It is immensely strong in America where there exists a wholly unfounded belief in America’s special providence.*

Historian Niall Ferguson talks about Chimerica which he describes in terms of a marriage in which one partner – perhaps a bit old and ugly – works and saves while the other – young and sexy – spends and spends and spends. The marriage will work so long as both are getting what they want. But it will start to fail when one partner decides that the other is not giving what is wanted or, worse, begins to understand that wants ≠ needs and that needs must dominate. Right now China, amongst others, is underwriting America’s debt. But what happens when any one of the major underwriters decides that America no longer meets its (the underwriter’s) needs?

Tax increases, even major tax increases, alone will not suffice. Taxing and spending doesn’t work (are you listening Iggy?); Keynes was wrong. When one is too far into debt one must, as Jean Chrétien and Paul Martin did, raise revenue (mostly by raising taxes) and cut spending (Chrétien and Martin cut some spending, especially military spending, but the big cuts came in social transfers to three provinces: AB, BC and ON).


____________________
* Special providence is, essentially, a religious idea that got transmogrified into a sort of political creed in America – twice: back circa 1895 and again around 1945 as Americans sought to understand their successes. They overlooked such obvious explanations as good geography, good people, good institutions and bloody hard work. Instead many, many Americans came to believe that some god(s) or (an)other(s) decided to, specially, “bless” America. It ain’t so, but ...

 

[Kirkhill]

The President understands this challenge, because he has spoken about it. But in the midst of the worst economic downturn since the 1930s, his discourse about the imbalances has been sotto voce. Soon, however, it must become one of his most urgent narrative lines.

I admit I am at risk of ODS (Obama Derangement Syndrome). That said, the inanity "The President understands this challenge, because he has spoken about it."  really pushes the limit.  Does Tom Cruise understand F-14s because he acted the part in Top Gun?  Just because the village idiot apes the town cryer that doesn't imply that either the idiot or the cryer understand the text.

Yes, the Americans are living beyond their means.  And a lot of other people assisted them in getting there - people demanding financial aid from a pauper for example.

The great fear of the international community, it seems to me, is that the American's start living within their means - economic isolation.
The Americans don't need the outside world for much of anything.  They have made decisions (many of them silly) that accomodate the outside world.

For example:

Buying energy when they have plenty of usable energy available to them at home;
Buying foreign cars, tvs, fridges ...... computers when they could make them themselves;
Providing forces to maintain order on lines of communications to facilitate trade - trade that is secondary to its own survival needs;

Yes, it benefits the US to trade but trade is not the sine qua non that it is for resource poor countries like Hong Kong, Singapore, China or Germany and France.

The great fear is that the US will retrench on trade and start "living within its means".

 

[Redeye]

The great fear is that the US will retrench on trade and start "living within its means".

The thing is that that would be devastating all around, including for the United States.  The fact is that they are dependent on others, at least in short run.  They are dependent on oil that they cannot efficiently produce themselves.  They import things like TVs from foreign countries because it is more efficient to produce them where labour is cheaper.  Impeding free trade creates dead weight losses in economic terms.  One only needs to look at the impact of the Smoot-Hawley tariffs on prolonging economic misery during the Great Depression.  So there will be American producing TVs again - but the trade off will be that price is higher and so fewer people will have them.

The effects of the Buy American nonsense are already being felt in a number of places, including Canadian businesses that are losing business as a result - and are, in some cases, looking to move their operations to the US because their biggest customers are there.  Recently on Radio One a manufacturer of equipment which is specifically used in water treatment plants based in Halton Hills, ON was explaining that he was exploring moving his production operations to Bradford, PA because of Buy American rules preventing him from selling product to Americans.  Since infrastructure spending is a large part of the US stimulus effort, he was missing the chance to capture a huge market opportunity.

The cost would be a number of jobs in Halton Hills, and a hit to their tax base as a result.

It's true people fear the idea of America going protectionist, but the reality is that's as bad for America as it is everywhere else.

 

[a_majoor]

Moving from the "Macro" living within our means arguments to more "micro" efforts:

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5516536/US-cities-may-have-to-be-bulldozed-in-order-to-survive.html

US cities may have to be bulldozed in order to survive

Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

By Tom Leonard in Flint, Michigan
Published: 6:30PM BST 12 Jun 2009
Comments 737 | Comment on this article

The US government is looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature Photo: GETTY
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.

"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."

Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.

"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.

Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.

Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.
The exodus – particularly of young people – coupled with the consequent collapse in property prices, has left street after street in sections of the city almost entirely abandoned.

In the city centre, the once grand Durant Hotel – named after William Durant, GM's founder – is a symbol of the city's decline, said Mr Kildee. The large building has been empty since 1973, roughly when Flint's decline began.

Regarded as a model city in the motor industry's boom years, Flint may once again be emulated, though for very different reasons.

But Mr Kildee, who has lived there nearly all his life, said he had first to overcome a deeply ingrained American cultural mindset that "big is good" and that cities should sprawl – Flint covers 34 square miles.

He said: "The obsession with growth is sadly a very American thing. Across the US, there's an assumption that all development is good, that if communities are growing they are successful. If they're shrinking, they're failing."

But some Flint dustcarts are collecting just one rubbish bag a week, roads are decaying, police are very understaffed and there were simply too few people to pay for services, he said.

If the city didn't downsize it will eventually go bankrupt, he added.
Flint's recovery efforts have been helped by a new state law passed a few years ago which allowed local governments to buy up empty properties very cheaply.

They could then knock them down or sell them on to owners who will occupy them. The city wants to specialise in health and education services, both areas which cannot easily be relocated abroad.
The local authority has restored the city's attractive but formerly deserted centre but has pulled down 1,100 abandoned homes in outlying areas.

Mr Kildee estimated another 3,000 needed to be demolished, although the city boundaries will remain the same.
Already, some streets peter out into woods or meadows, no trace remaining of the homes that once stood there.

Choosing which areas to knock down will be delicate but many of them were already obvious, he said.
The city is buying up houses in more affluent areas to offer people in neighbourhoods it wants to demolish. Nobody will be forced to move, said Mr Kildee.

"Much of the land will be given back to nature. People will enjoy living near a forest or meadow," he said.

Mr Kildee acknowledged that some fellow Americans considered his solution "defeatist" but he insisted it was "no more defeatist than pruning an overgrown tree so it can bear fruit again".

The big potential problem is that the city could (will) begin picking and choosing "winers and losers", expropriating properties that border on areas slated for demolition etc. The end results could be very ugly (and what sort of waste-land will be left after demolishing a neighbourhood?)

 

[Kirkhill]

So low cost housing will be bulldozed to inflate the value of the stuff that's left and the homeless will remain homeless. Or will the inflated taxes paid with inflated dollars on inflated properties be used to build houses for people that couldn't afford the low cost housing that is going to be bulldozed?

Used to was that you built a house.  You lived in it.  If you sold it, it was "Caveat Emptor".  Then the bureaucrats said you couldn't live in a house that satisfied you.  You had to live in a house that satisfied them, produced by a licensed supplier at an elevated price....thereby ensuring that some portion of the population would not be able to buy a roof over their head and would not be allowed to put one up themselves.

 

[a_majoor]

Too true. I noticed that the one solution (disincorporating all or part of the city) and shrinking the civic government to reflect the new realities does no seem to be part of anyone's vocabulary. Realistically, a town of Flint surrounded by several villages created by the remmnants of subdivisions with sufficient population to remain viable seems to be the true viable end state, once the imperial government of the "City of Flint" is factored out.

 

[time expired]

I think I am beginning to understand whats going on,the fiscal incompetent
and irresponsible,individual and cor perate, are going to be bailed out by the
government.That means the people who live in a house they can afford,pay
their credit card bills at the end of the month,and generally avoid dept are
going to foot the bill through their taxes and their children's taxes and more
than likely their grandchildrens taxes.Please tell me that I am wrong.
                                Regards

 

[Edward Campbell]

I think I am beginning to understand whats going on,the fiscal incompetent
and irresponsible,individual and cor perate, are going to be bailed out by the
government.That means the people who live in a house they can afford,pay
their credit card bills at the end of the month,and generally avoid dept are
going to foot the bill through their taxes and their children's taxes and more
than likely their grandchildrens taxes.Please tell me that I am wrong.
                                Regards

Nope! Sadly, you are dead right. That is precisely what is happening.

Additionally, by debasing his own currency, President Obama wants to get the rest of the world to underwrite the exercise.

 

[a_majoor]

I'm not sure the rest of the world is ready for this type of "Hope and Change". Fiscal collapse of this magnitude will drag everyone down, and we are like a small lifeboat tied to the stern of the Titanic.....

Raising taxes is not an option, since many people are already practicing tax avoidance strategies, and everyone going "Galt" will simply make the problem strike home that much sooner. Reducing spending is the only way, and for Americans it realisticly means cutting Medicare, Medicaid and Social Security (the biggest and fastest growing portions of the "entitlements" that eat tax dollars), as well as cutting all the various subsidies to business, labour, agriculture, education...

Either they reduce spending in a controlled fashion, or all these programs will end rather abruptly in an uncontrolled fiscal crash.

http://reason.com/blog/show/134436.html

Debt and Taxes: The CBO's Dire Projections
Peter Suderman | June 29, 2009, 4:23pm

How bad is the CBO's latest report on the country's budgetary future? The Washington Post calls the office's numbers "dire." U.S. News says they're "off the wall." And in a post about the report on his blog, the CBO's director, Douglas Elmendorf, writes that "under current law, the federal budget is on an unsustainable path." 

What's the problem? In a word, debt: The Post's editorial board summarizes the CBO's findings as follows:

Debt is growing faster than gross domestic product. Under the CBO's most realistic scenario, the publicly held debt of the U.S. government will reach 82 percent of GDP by 2019 -- roughly double what it was in 2008. By 2026, spiraling interest payments would push the debt above its all-time peak (set just after World War II) of 113 percent of GDP. It would reach 200 percent of GDP in 2038.

Elmendorf writes that, in order to prevent "substantial harm to the economy," there are only two options available: spending cuts or tax hikes — and whatever we do, we have to do it soon. From his blog entry:

Keeping deficits and debt from reaching levels that could cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy.  Although the policy choices that will be necessary are difficult, CBO’s long-term budget projections make clear that doing nothing is not an option: Legislation must ultimately be adopted that raises revenue or reduces spending or both. Moreover, delaying action simply exacerbates the challenge...