Oct 31

Solutions for Everything, Answers to Nothing

Gold Price Comments Off on Solutions for Everything, Answers to Nothing
Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Jun 04

Underfunded State Pensions: The "Nuclear Solution"

Gold Price Comments Off on Underfunded State Pensions: The "Nuclear Solution"
A political solution is unlikely. Try bankruptcy on for size…
 

With FEW EXCEPTIONS, state and local pension funds are woefully underfunded, writes Dennis Miller, editor of Miller’s Money, at Doug Casey’s research group.
 
Five heavily populated states – California, Illinois, Ohio, New Jersey, and Texas – collectively lack $431.5 billion; money that won’t be paid out to hopeful pensioners. That’s according to those states’ own accounts published in a 2012 Harvard University study that was led by former Assistant Treasury Secretary Tom Healy.
 
And the real numbers may be even worse: Accounting for current low interest rates, Healy and his coauthors estimate that the true extent of underfunding is $1.26 trillion.
 
When your tab is floating in the nebulous zone between $431.5 billion and $1.26 trillion, does the exact number really matter? Either way, you can’t pay it. Even wrapping your mind around numbers that large is difficult – like trying to visualize distances described in light-years.
 
In an understandable move to protect their interests (read: limit future tax liability), corporate heavyweights including Dow Chemical, ExxonMobil, Google, and Walmart sponsored a three-day judicial conference on public pension reform at George Mason University School of Law last month. One headline from the conference agenda: “Bankruptcy: The Nuclear Option.”
 
If the “nuclear option” scares you, it should. Still, some cash-strapped state governments are pushing for it.
 
The upside of a republican form of government – like we have here in America – is that it’s difficult to get much done. That’s also its downside. There’s a lot of political maneuvering among pensioners, union representatives, taxpayers, corporations, and politicians themselves, but very little progress has been made to find a long-term solution to the pension problem.
 
The union position is simple. The public employees they represent upheld their end of the bargain, and now it’s up to the legislators to find the money to uphold theirs.
 
Where? In his report The Plot Against Pensions, liberal columnist David Sirota suggests redirecting the “$80 billion a year states and cities spend on corporate subsidies” toward the $46 billion annual public-pension shortfall.
 
Corporate leaders see things a bit differently, of course. They say reducing corporate subsidies or raising corporate taxes would hamper business development and lead to lower employment rates.
 
Like the unions, they blame state and local politicians for not properly funding their pension programs in the first place. Both have a fair point.
 
What Sirota didn’t mention in his report is that corporate subsidies attract and retain much-needed jobs. One Illinois school district nearly learned that the hard way. In 2011, District 300 rallied to end $14 million in annual tax benefits for Sears Holding Corp., the parent company of Sears, Kmart, Land’s End, and other brands.
 
Sears promptly countered by threatening to move its corporate headquarters out of Illinois if the state ended the tax advantages it had enjoyed for 23 years.
 
And it wasn’t an idle threat either. Office Max, which recently merged with Office Depot, started moving 1,600 jobs out of Illinois last month after the state refused millions in tax breaks the company had requested.
 
Smaller businesses are getting out of Dodge too. Deron Lichte moved his 100-job business – Food Warming Equipment Co. – to Tennessee to escape Illinois’ 2011 income tax increase and its hefty corporate income tax – the highest in the nation.
 
Speaking of taxes, individual taxpayers are no more inclined to pay for underfunded pension promises than corporations are. Just like Office Max, Illinois residents are voting with their feet. And why shouldn’t they?
 
Legislators can’t hike taxes indefinitely to cover underfunded pensions and other government debts, and then gasp in surprise when their constituents walk. In fact, my wife and I sold our Illinois home because we were fed up with the high taxes.
 
In the book How Money Walks, author Travis H. Brown writes that from 1992 to 2011, Illinois lost $31.27 billion in taxes per year because former residents like myself refused to put up with its predatory taxation.
 
The same goes for New Jersey, which according to wealth management firm RegentAtlantic Capital lost $5.5 billion in taxable income in 2010 alone because residents moved out of state, often fleeing the state’s “millionaire’s tax.”
 
Plus, US citizens from all 50 states (including one member of our team) are now heeding the call of Puerto Rico’s alluring new tax benefits.
 
States and cities can’t tax their way out of the public pension crisis. More and more people will simply get up and move. Would the last person out the door please turn out the lights?
 
While campaigning, Illinois governor Pat Quinn pledged to cut government expenses instead of raising taxes. We’ve heard that many times before, of course, and true to form, shortly after taking office, Quinn gave raises averaging 11.4% to 35 staffers. The public howled, so Quinn back-pedaled, giving the staffers 24 days off without pay so their salaries would ultimately stay the same.
 
Apparently it never occurred to Quinn that if 35 staffers can do their jobs with an additional 24 days off, he might be overstaffed. If all politicos are this financially pragmatic, don’t expect a pension-funding solution anytime soon.
 
Federal law allows local governments to seek Chapter 9 bankruptcy protection so long as state law permits it where the municipality is located. Cities like Stockton, CA, San Bernardino, CA, and most famously Detroit have already taken this path.
 
On the other hand, federal law doesn’t offer states bankruptcy protection – and it probably wouldn’t be constitutionally sound if it did. State-level bankruptcy is a scary thought – but it isn’t all that far-fetched either. Mainline politicians like former House Speaker Newt Gingrich and former Florida Governor Jeb Bush have both supported it.
 
There are obstacles, though: Congress would first need to amend the bankruptcy code, individual states would need to authorize application of that hypothetical law, and the Supreme Court would have to rule on whether the contracts clause prohibits states from declaring bankruptcy even if Congress allows it.
 
I don’t expect this particular nuclear bomb in my lifetime. I can’t say the same for my grandsons, on the other hand.
 
There are real-life people depending on these underfunded public pensions. While I’m still flabbergasted that anyone would rely on promises made by the government, these public employees will suffer from the fallout.
 
Personally, I would suggest that every public employee should immediately – as in yesterday – start charting a private path to retirement. If those pension checks are there when you retire, they’ll be a welcome bonus. But don’t rely on them.
 
For that matter, private- and public-sector employees alike should independently prepare for their retirement. The only person you can rely on is you – and all it takes to turn that self-reliance into a low-stress retirement is a working knowledge of investing and personal money matters.
 
It is possible to plan ahead and get a steady flow of income every month, even if your public pension checks never come in and whether or not you’re still working. My team of analysts has put together a special report called Money Every Month that details how you can get a regular “paycheck” by investing in certain stocks – which we name in the report – according to a certain schedule. Learn more here…
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