Big Trouble for the Euro as Massive Greek Debt may be too much for the German People to Endure

Posted by PITHOCRATES - September 11th, 2011

Loans aren’t Gifts, you have to Pay them Back

Tax. Borrow. Print. And spend. The social democracies of Europe have been doing it for years. Thanks to central banking. And fiat money. And a little of John Maynard Keynes. You can keep interest rates artificially low. Deficit spend at will. Sell bonds forever and ever. And even print money. That’s Keynesian economics. Liberal Democrats in America were so enamored with the Europeans that they followed their example. And with government having the power to monetize debt, what could go wrong?

Apparently, a lot. Standard and Poor’s just downgraded U.S. sovereign debt. Citing high debt. And growing deficits. Leading them to believe that the U.S. may have trouble paying back what they’ve borrowed. Saying the U.S. government was living beyond their means. Just because they were spending more money than they had.

You mean we can’t do whatever we want? That’s right. You can’t. Because debt has consequences. You can’t keep borrowing more every year. Because people loan money (i.e., buy bonds) expecting you to pay back that loan. Yeah, I know. Crazy talk. But true nevertheless. Loans aren’t gifts. You have to pay them back.

The Root Problem within the Eurozone is Excessive Government Spending, Deficits and Debt

The U.S. has some financial problems. Record deficits. And record debt. Used to finance ever growing government spending. Yes, things may be bad in America, but they pale in comparison to the problems they have in the Eurozone (see German Dissent Magnifies Uncertainty in Europe by Liz Alderman posted 9/11/2011 on The New York Times).

Despite repeated pledges by Chancellor Angela Merkel to keep Europe together, the cacophony of dissent within her country is becoming almost deafening. That is casting fresh doubt — whether justified or not — over the nation’s commitment to the euro.

“The German electorate is not in the mind-set to undertake actions it sees as subsidizing less worthy nations,” said Carl Weinberg, the chief economist of High Frequency Economics in Valhalla, N.Y. “As a result, the government is moving in a very isolationist way to try to establish a fortress Germany that’s economically secure despite the risks in its European Union partners.”

This weekend, Der Spiegel reported that the German government was starting to prepare for a Greek insolvency and was devising various responses to handle a potential default, including allowing Greece to abandon the euro and return to the drachma. The government in Berlin would not comment, but such reports only add to the doubts bedeviling the euro monetary union.

The root problem within the Eurozone is excessive government spending, deficits and debt. Especially in Greece. Where they’ve borrowed heavily to pay for a very generous public sector. And state benefits.

There were strict requirements to join the monetary union. To change their currency to the Euro. The Euro Convergence Criteria required an annual government deficit of 3% of GDP. Or less. And total debt of 60% of GDP. Or less. Deficit and debt above these limits endangered a nation’s financial stability. And the common currency. The Euro. Which would spread one country’s irresponsible ways to the other countries in the Eurozone.

And that’s exactly what happened. Greece ‘fudged’ their numbers. So while they passed themselves off as fiscally responsible they were anything but. Their deficit and debt far exceeded the Euro Convergence Criteria. And when the global financial crisis of 2008 hit, it hit Greece hard. A couple of years later, with their economy depressed, S&P downgraded their sovereign debt. Increasing their borrowing costs. Which they couldn’t afford. So they had to turn to the international community for help. And it came. With a price. Austerity. Which the Greek people didn’t like.

Because of the common currency, Greece’s problems were now Germany’s problems. Because they were the strongest economy in the union. And the German people are growing tired of picking up the tab for Greece. And they’re not alone.

Finland, the Netherlands and Austria have all spoken with dissonant voices on the Greek bailout, revealing deep divisions among Europe’s strongest countries about how far they should go to save their weaker neighbors.

Continued fears over the state of European banks, and French ones in particular, have also roiled financial markets, especially after Christine Lagarde, the managing director of the International Monetary Fund, warned that European banks needed substantial additional capital.

Meanwhile, fears over Greece are only likely to intensify this week, after Mrs. Merkel’s finance minister, Wolfgang Schäuble, warned that Germany, for one, would not approve new financial assistance to help Athens continue to pay its bills through Christmas unless the Greek government fulfilled the conditions of its first bailout.

Can you blame them? Would you want to loan more money to a family member that continues to spend beyond their means? People want to help others. But they don’t want to finance the irresponsible ways that caused their problems in the first place. Austerity isn’t fun. But others are doing it. As they try to adjust their budgets to live within their means.

Outside of Greece, some things have improved, if only haltingly. Italy’s lower house of Parliament is expected to approve a tough new fiscal package in coming days.

France, Portugal and Spain are adopting measures to make it easier to balance budgets, moves intended to reassure investors about their commitments to fiscal prudence.

Which is not helping Mrs. Merkel. For if she continues to try and save the Euro her party may lose power.

Still, Mrs. Merkel must contend with a stark divide between her support for European unity and a German public that sees no reason, in the majority’s view, to pour good money after bad into the indebted countries of southern Europe. Her Christian Democrat Party has now lost five local elections this year. Yet even as many Germans complain bitterly about their southern neighbors, few in business and politics are ready to let the euro zone fall apart.

After all, if the weakest countries were to revert to their original currencies, a German-dominated euro would soar as investors flocked to it as a haven, devastating the business of exporters who have relied on its stability and relatively affordable level against other major currencies.

Then again, if she doesn’t save the Euro, her export economy may tank. A weak Greece is helping to keep the Euro undervalued. And you know what an undervalued currency does. It makes your exports cheap.

Any American who vacationed in Canada understands this well. Back when the U.S. dollar was strong, it was nice crossing into Canada. When you exchanged your strong American dollars for Canadian dollars, you got a lot more Canadian dollars back. In other words, the American dollar bought more in Canada than in the U.S. So people took their vacations in Canada. Which made the Canadian tourism industry boom.

This is the value of a weak currency. When your currency is weak, goods and services in your country, or goods exported out of your country, are cheaper. And the weaker nations in the Eurozone are keeping the Euro undervalued. And German exports strong. But it comes with a price. The taxpayers are basically subsidizing the export industry. By subsidizing the Greece bailout.

In other words, the Germans are damned if they do. And damned if they don’t.

The More the Debt the More the Crisis, the Less the Debt the Less the Crisis

Governments embrace Keynesian economics because it gives them power. It facilities their deficit spending. Legitimizes it. They and their Keynesian economists will dismiss growing debts. Because they’re no big deal. You see, their policy of continuous inflation shrinks that debt in real terms. In other words, as you devalue the currency, old debts are worth less. And easier to repay years later.

But there’s a catch. You need a growing GDP for this to work. When the economy stagnates, tax revenues fall. And if those debts are too big you just may not be able to service those debts. And you know what can happen? Greece. So too much debt can be a bad thing.

And it’s a dangerous game to play. Because as that debt grows so must taxes to service that debt. So they increase tax rates. But higher tax rates work against growing GDP. Flat or falling GDP means less tax dollars. Which leads to more borrowing. So the solution to the problem is more of what caused the problem. Which makes the original problem bigger. It’s a vicious cycle. Until the cycle ends in a credit downgrade. And financial crisis.

Keynesians can say what they want. But one thing they can’t deny is this. If these countries had no debt then they would have no financial crisis. Some countries have less debt and are not in crisis. While the countries in crisis have excessive debt. See the pattern? The more the debt the more the crisis. The less the debt the less the crisis.

Even Keynesians can’t deny this. Then again, Keynesians could. For they do live in denial.

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FUNDAMENTAL TRUTH #82: “Too much debt is always a bad thing.” – Old Pithy

Posted by PITHOCRATES - September 6th, 2011

Paying Interest on Interest makes Credit Card Balances Soar

Some of us have been there.  Some of us are there now.  And hopefully some will learn this painful lesson without ever having to be there.  I’m talking about those seductive credit sirensCredit cards.  Who lure us with their access to a life we cannot yet afford.  Only to destroy us when we’re fully within their grasp.

For those who have lived it, I apologize for evoking the spirits of memories past.  For those feeling the full weight of despair and hopelessness now, hang in there.  You’ll get through.  It may be painful.  But time will mitigate that pain.  Just think of a point in time past the painful times.  Where it will be better.

It happens before we realize it.  You’re charging a little each month.  It doesn’t seem like a lot.  But it adds up.  Worse, the interest really adds up.  For two reasons.  High interest rates.  And because that interest is rolled into your outstanding balance.  So you’re paying interest on interest.  Which makes those balances soar.

The Credit Card Companies have High Interest Rates because it’s Unsecured Credit

The easiest way to look at this is with numbers.  So let’s do that.  Let’s look at a 5 year period.  Each year say you charge $6,000.  That’s $500 each month.  Or about $115 per week.  Charge a couple of dinners and you’re almost there already.  Buy some clothes.  Buy a round of drinks after work.  Say you buy a TV during the year.  Or some other toy.  Like a tablet PC.  Or charge a vacation.  It will add up faster than you ever thought possible.  Things are good at first.  Sure, you’re running a little deficit.  But you’re able to do things or have things you otherwise couldn’t.  Besides, it’s not that much really.  And you can stop at any time.

But it’s that interest that will get you.  Say your card has an APR of 29%.  That’s a huge rate.  Why is it so high?  Because it’s unsecured credit. When you get a mortgage and you default on your payments, the bank gets your house.  The credit card companies have no such claim.  All they have is your promise to pay them back.  And a lot don’t.  Hence the high APR.  To pay for those who don’t repay what they borrow.

Let’s assume your minimum monthly payment is a consistent 5% of your outstanding balance.  For simplicity, we’ll calculate interest on the beginning balance plus the new charges for that year.  That 5 year period looks something like this:

High Credit Card Balances require Austerity, Spending Cuts and a Second Job

In these 5 years you charge $30,000.  But your outstanding balance is almost twice that.  Because of paying interest on interest.  This is what really makes that monthly payment increase.  Which wasn’t too bad in the first year or so.  But by the third year you’re feeling it.  You’re finding it difficult to pay all your bills.  By the fourth year you’re struggling to make your house payment.  By the fifth year the collection agencies are calling you.

So you cut up your credit cards.  And start an austerity program.  Cut spending.  No more cable.  Cell phone.  Maybe take a part-time job.  You think you stopped the bleeding at least.  Now it’s just a matter of paying down that balance.  But it isn’t quite like that.  Because you’re still paying interest on interest.  So even though you’re not charging anymore, your balance is still increasing.  Only worse now.  So let’s take a look at the next 5 years.

That second job you took to help pay down this balance can’t stop it from growing.  Even with no new additional charges.  And that monthly payment just continues to grow.  It’s a losing battle.  However hard you try your balance and monthly payment continue to grow.  To unsustainable levels.

High Credit Card Balances makes Real Income Decline

Let’s say at the beginning of this 10 year period you earn $30,000.  And each year you get a 3% raise.  Enough to keep you ahead of inflation.  With a little left over.  During good economic times, at least.  Now let’s look at a simple graph.  Showing your income.  And your income less your credit card payments.  For this 10 year period.

Your income may have steady growth, but it’s all going to the credit cards.  While income rises 3% your ‘net’ income is flat.  Factor in inflation and this is a decline in real income.  Makes it hard to raise a family.  When your costs go up.  But your income doesn’t.  And it’s far worse than this graph indicates.

Credit Card Balances tend to Increase at a Rate greater than your Income

You may be stressing to just pay your bills.  Which is harder to do each year because of that growing credit card balance.  And nothing will get better until that balance goes down.  But that’s easier said than done.  Because of paying interest on interest.  You may run to get ahead of this increasing balance.  But it’s a race you will lose.  Because that balance will increase at a far greater rate than your income.  As shown here:

After the fifth year your options are limited.  Severe austerity won’t help.  A part time job won’t help.  The numbers are by then just too big.  If you’re married and have a grandparent that can provide free child care, two full-time incomes may help.  Provided your spouse has high income potential.

But chances are you won’t get this far in the graph.  Your credit will probably be shot by the fifth or sixth year.  The collections agencies will be telling you to sell your assets (tools, cars, wedding wings, etc.).  That won’t be pleasant.  But there is some light at this end of the tunnel.  Once they throw you to collections, there should be no more interest charges.  So your credit will be shot.  But you’ll at least be paying down a falling balance.

Living beyond your Means leads to Austerity then Bankruptcy

Credit cards are convenient.  But you should use them as cash.  Pay them off in full every month.  Because living beyond your means will only saddle you with debt.  And too much debt is always a bad thing.  The bigger the debt the more of your money goes to paying the interest on that debt.  Leaving less for the things you currently enjoy.  That you will have to give up so you can pay that interest.

And if your debt grows past the point of no return bankruptcy may be your only option.  And everything bad that comes with it.  A bad credit rating.  Making it more difficult to buy a car.  Or a house.  Even getting a store credit card so you can buy your kid a computer for school.  Something you could afford in 6 monthly payments.  In one of those 6 months same as cash offers.  But not cash out of pocket.

It is inevitable.  When it comes to living beyond your means.  Austerity.  Then bankruptcy.  Unless you’re the government.  And can simply print money.  But that can only postpone the inevitable.  And the longer you postpone the inevitable, the more painful the inevitable will be.  Whether you’re an individual.  Or a government.

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The Liberal Battle Cry: Damn the S&P Downgrade, full Tax and Spend Ahead

Posted by PITHOCRATES - August 7th, 2011

The Democrats are already making Strategy to Encourage a Second Credit Downgrade

S&P downgraded U.S. debt because Congress failed to make significant, and real, spending cuts.  Now either that’s important.  Or it’s not.  During the debt ceiling debate they warned us of impending doom should the U.S. lose its coveted AAA rating.  Now that we lost it, well, it’s not that big of a deal.  In fact, the Democrats are already making strategy to encourage a second credit downgrade (see U.S. Debt Drama Is Far From Over by Albert Hunt, Bloomberg News, posted 8/7/2011 on The New York Times).

Specifically, they hope the president will insist that every dollar of spending cuts the supercommittee demands be accompanied by a dollar of higher revenues, and to say that changes in entitlements and taxes are joined at hip.

Mr. Obama, they say, also should play the national security card, forcing Republican to choose between higher taxes or about $600 billion in defense cuts.

“He can force Republicans to make a fundamental choice: Do they care more about protecting tax breaks or national security?” says the ranking Democrat on the House Budget Committee, Representative Chris Van Hollen of Maryland.

This is truly Orwellian.  We’re going to cut spending by not cutting spending.  For every dollar we cut we’re going to add another dollar of spending.  So, if you do the math, the net change in the deficit will be zero (-$1 + $1 = $0 of deficit reduction).  Granted these members may not possess higher degrees in mathematics.  But I’m sure somewhere in their education they learned the three Rs.  One of which was ‘rithmetic.  That math discipline that teaches kids how to add and subtract numbers.

Perhaps they skipped their arithmetic lessons to attend ‘hating your country’ lessons instead.  “If you don’t increase taxes we’ll cut defense spending. And when we’re attacked and people are killed it will be your fault for not increasing taxes.  How do you like them apples?  Huh?  You like that?  Don’t think we’ll do it?  Try me.”

A Redistribution of Economic Activity doesn’t add Economic Activity

Spending.  That’s all they want to do.  Spend.  Spend.  Spend.  Because it takes care of people.  And it stimulates the economy (see 20 areas on the brink of economic recovery by Venessa Wong posted 8/7/2011 on Bloomberg Business Week).

A key sector that is no longer expected to boost the recovery is government. “The metropolitan areas that suffered least since the beginning of the recession typically had increases in the number of government jobs,” the Brookings report states. Many state and local governments are shedding employees to cope with budget shortfalls.

Oh dear.  Reduced government spending?  Why, that will throw the economy into recession.  For any school kid knows that the government drives all economic activity.  At least that’s what they think. 

The city of Detroit fought for years to get casinos.  For they were sure it was the panacea for all that ailed their city.  They pointed across the Detroit River at Caesars Windsor.  And all the money it was bringing into the city of Windsor.  “See?!?  Casinos are just big piles of money with buildings over them.”  And, so, they eventually got their casinos.  Didn’t help the city a damn bit.

The problem with the casinos is that they didn’t bring new money into the economy.  They just siphoned off money from other businesses in the local economy.  People gambled with money they would have spent at the movies.  On dinners.  At ballgames, concerts, museums.  Etc.  So it was only a redistribution of economic activity.  The same money was spent.  It was just spent at different locations in the same local economy.  Ergo, it didn’t do a damn thing to help the city.

It’s the same with government spending.  The money government spends is taken from people who would have spent it themselves in their local economy.  So government employees are spending money that others would have spent.  If it wasn’t taken away from the people who earned the money.  So it’s only a redistribution of economic activity.  The net add to economic activity is zero. 

Most People would say that Obama Campaigned as a Centrist but Governed as a Liberal

Of course there is a very large school of thought that disagrees with this.  Keynesian economics.  The school of thought that says government spending stimulates when the private sector will not.  The Obama administration is full of Keynesians.  Who hold one simple philosophy.  Spend.  And spend they did. 

The 2008 deficit was $455 billion.  Which included TARP.  The bailout program for the subprime mortgage crisis.  The 2011 projected deficit is $1.6 trillion.  That’s over a trillion dollars of additional deficit spending.  Which is pretty darn leftist in most books.  But there are some who call this being a moderate (see Stuck in the Muddle by Paul Krugman posted 8/7/2011 on The New York Times).

The one thing I might say is that we shouldn’t really wonder what happened to Obama — he is who he always was. If you paid attention to what he actually said during the primary and the election, he was always a very conventional centrist. Progressives who flocked to his campaign basically deluded themselves, mistaking style for substance. I got huge flack for saying that at the time, but it was true, and events have borne it out.

Funny.  Most people would say that he campaigned as a centrist.  But governed as a liberal.

Barack Obama has the distinction of having the most liberal voting record in the Senate.  As president, when he had majorities in both the House and the Senate, he pushed through Obamacare.  National health care.  The holy grail on the Left.  And he calls this centrist?  One shudders to think what a Krugman progressive would do.

Liberals just want to Tax & Spend, Redistribute Wealth and Play God

No one seems to get it.  Except for Standard and Poor’s.  The Tea Party.  Some Republicans.  A few others.  And Daniel Hannan.  Who once told Gordon Brown, “You cannot spend your way out of recession or borrow your way out of debt.”  And he’s from the UK.  Home of John Maynard Keynes.  So why can’t the Left get it?

Because all they want to do is spend.  Tax and spend.  To redistribute wealth.  And play God.  Which should be abundantly clear by now.  Based on their words and actions.

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No Deficit Reduction and the Credit Rating Agencies don’t Care

Posted by PITHOCRATES - August 3rd, 2011

The Credit Rating Agencies wanted Serious Spending Cuts and our Glorious Government Delivered 

It was scary.  We stared into the abyss.  We stood at the edge of the world as we knew it.  With one foot held up midstride, dangling precariously over the void.  Ready to tumble forward into the chasm of fiscal demise.  And then something happened.  Congress compromised.  There would be more debt.  There would be more spending.  And they restored our financial house to order.  We could put that foot down on terra firma.  Everything was going to be all right.  Like it was before.  Hallelujah (see U.S. Debt Rating: Economists Wait to Hear From S&P by Susanna Kim posted 8/3/2011 on ABC News).

Now that President Obama has signed the debt ceiling deal and averted a default, economists are waiting to see if ratings agency Standard and Poor’s will downgrade the nation’s credit rating…

At stake in all this is not only interest rates the US must pay on its $14.4 trillion debt, but a host of rates for consumers, from mortgages to car loans to credit cards. A downgrade of US debt would cause interest rates of all kinds to edge up and that would cost the US and consumers billions of dollars. The stock market plunged yesterday partly on worries about this possibility.

What a horrible fate this would have been.  God bless Barak Obama, Harry Reid, John Boehner and everyone else that did such an extraordinary job of saving us from this fate.  The credit rating agencies wanted to see some serious spending cuts.  And by God if that isn’t what our glorious government gave them.  Moody’s and Fitch have already given us the good news.  We’re still AAA with them.  Just waiting on Standard and Poor’s.  If they still like us we’re golden.

No spending cuts, no Deficit Reduction and no Credit Downgrade, were they Lying?

The only problem with this is that it is all bull [deleted expletive] (see Spending Cuts Seen as Step, Not as Cure by Binyamin Appelbaum posted 8/2/2011 on The New York Times).

There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.

By the end of the 10-year deal, the federal debt would be much larger than it is today.

Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.

Well how can this be?  More spending?!?  And not just a little but a lot.  So much that it will grow faster than the economy.  But they told us they made real spending cuts.  That they made some real deficit reduction.  Are you telling me that our government lied to us?

Stabilizing that [debt] ratio would require about $4 trillion in cuts over the next decade, according to a number of independent analysts. That is also the target that S.&P. declared the nation must meet, and it was the goal of the “grand bargain” that Mr. Obama tried to reach last month with Speaker John A. Boehner.

The deal they reached instead contains cuts of at least $2.1 trillion over the next 10 years. By the end of that period, the federal debt could equal as much as 80 percent of economic activity, and rising.

Guess so.  We barely made half of the recommended cuts and two of the agencies already gave us their blessings.  Which begs the question was all that fear mongering of the debt downgrade just bull you-know-what?  Just a trick to raise the debt ceiling?  I mean, this deal should have triggered the credit downgrade.  It doesn’t cut spending or reduce the deficit.  So how can it be the end of the world as we know it one minute and then credit rating bliss the next?  Because nothing changed.  Something fishy here.

With the Spending Crisis over, now comes More Spending

All right, so the spending cuts were only phantom spending cuts.  Just designed to fool the American people so the government can do what they do best.  What they always planned to do.  Even though the credit rating agencies said we can’t keep doing it.  Spend with reckless abandon (see Compromise achieved, reform’s the next chapter by Timothy Geithner posted 8/2/2011 on The Washington Post).

The agreement creates room for the private sector to continue to grow, without the threat of default and the burden of higher interest rates…

And by locking in long-term savings, Congress will have more room in the fall to pass additional short-term measures to strengthen the economy — such as extending the payroll tax cut, which provides an average of a thousand dollars to the after-tax incomes of working Americans; extending unemployment benefits; and financing infrastructure investments. After all, strengthening growth and putting more Americans back to work are among the most important things we can do to improve our fiscal situation today and over the long term.

This is like a chain smoker who just got the scare of his life.  A bad lung X-ray that could be cancer.  Only to find out later that it wasn’t cancer.  He feels so good that he lights up to celebrate his good health.

The government has already tried every Keynesian stimulus in the book.  A trillion dollar stimulus bill.  Subsidies for green energy (the economy of the future).  Tax credits.  Shovel ready jobs.  None of this helped the economy.  It just gave us a spending crisis that added so much debt that the credit agencies are threatening to downgrade the U.S. bond rating.  Additional spending is not going to improve our credit worthiness.  In fact, it will do that other thing.  The opposite thing.  It will make it much, much worse.  How can they not see this?  Was I the only one paying attention these past weeks?

When the Market Corrects things get Better; when the Government Corrects you get Double-Dip Recession

So it’s been all smoke and mirrors.  So what?  So they like to spend.  But their spending stimulates, does it not?  They’re investing in the future.  To win the future.  Like green energy.  The economy of the future.  They’re pouring money into this to create jobs and stimulate the economy.  And imagine how bad things would be if they didn’t do this.  Instead of a double-dip recession we may be in a triple-dip recession.  The recession could be one dip worse, then, couldn’t it?

Yeah, that’s a joke.  The economy is horrible despite everything they’ve tried.  Or perhaps it’s horrible because of everything they’ve tried.  Spending for the sake of spending hasn’t produced any results yet.  Just take a look at the Chevy Volt.  The car that was to lead GM back from the abyss.  And change the American automobile industry.  The Obama administration was going all in on this car.  Even ponying up $7,500 in tax credits per car just to make people buy these things.  But apparently the people don’t like the Chevy Volt.  Because they’re not buying them.  Even with a federal gift of $7,500 to sweeten the deal (see Chevy Volt: Still Not Selling by Jonathan V. Last posted 8/3/2011 on the weekly Standard).

The July sales numbers are out and the Chevy Volt continues to electrify (get it?) the country. GM sold … 125 Volts last month!

Way back in March I made fun of the Volt for selling 281 units in February. Turns out, February was a good month. But wait, there’s more! GM says they’re going to increase production to 5,000 Volts per month in order to keep up with demand. You see, they claim that the reason the Volt isn’t selling is that they can’t keep enough cars on the lot. A GM spokeswoman recently claimed that they are “virtually sold out.” Which is virtually true. Mark Modica called around his local Chevy dealers and found plenty of Volts waiting for an environmentally conscious driver to bring them home.

These numbers are so bad they’re embarrassing.  And building 5,000 units to meet a 125 unit demand?  You can tell the government is calling the shots at GM.

This is what happens when government starts running automobile companies.  They destroy automobile companies.  And wastes tax money.  They’ll keep raising taxes (and borrowing money) so they can ‘invest’ in jobs.  Creating jobs where people build things that nobody buys.  This is how the best and brightest tweak the economy.  Use Keynesian stimulus to correct for ‘market inefficiencies’.  Which in Washington is when people don’t spend their money ‘correctly’.

Of course, when the market corrects things get better.  When the government corrects you get a double-dip recession.

The Obama Administration did some serious Fear Peddling to get the Debt Ceiling Raised

The Obama administration did some serious fear peddling to get the debt ceiling raised.  First they tried to scare everyone that the government would default on their debt obligations.  When it was pointed out that there was some $200 billion of tax revenue coming in monthly they changed their story. 

Then they tried to scare old people by saying they couldn’t send out Social Security checks.  When it was pointed out that Social Security Trust Fund was full of treasury securities (i.e., IOUs) that could be converted into cash without any impact on the debt ceiling they changed their story. 

Then they tried to scare everyone that if they didn’t reduce the deficit with a balanced approach (new taxes and spending cuts, but mostly new taxes) the credit rating agencies would downgrade the U.S. AAA debt rating.  So far that hasn’t happened.  Despite there being no deficit reduction.

Well, they got their debt increase.  They may have been less than honest but they got it.  And what are they going to do with that additional $2.4 trillion?  Why, build more Chevy Volts, I guess.  And other winning-the-future job-creating Keynesian stimulus spending.  Because it’s worked so well these past few years.

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Debt Ceiling Deal Light on Cuts and Sets Stage for Future Taxes

Posted by PITHOCRATES - August 1st, 2011

$2.4 Trillion Debt Ceiling Deal may spend $96.68 for each Dollar Cut

Everyone seems to hate the budget deal to raise the debt ceiling.  Conservatives are saying they’ve been screwed.  Liberals are saying they’ve been screwed.  Interesting.  So exactly what did they agree to in order to hike the debt ceiling $2.4 trillion?  Which, incidentally, is the largest increase in history (see Small spending cuts to have little economic impact by Christopher S. Rugaber, Associated Press, posted 8/1/2011 on Yahoo! News).

Discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut by only $7 billion in 2012 and $3 billion in 2013, according a summary by Senate Democrats. That’s a tiny fraction of the nation’s $14 trillion economy…

The independent Congressional Budget Office offered its own analysis Monday. It said the agreement would reduce government spending by $25 billion next year. That’s compared to current law, which factors in a projected increase in spending.

The first phase of cuts would reduce spending by $917 billion over 10 years. A congressional committee would decide on a second phase of cuts totaling $1.5 trillion.

Whoever’s numbers you believe one thing is sure.  That’s not a lot of cuts.  The cuts are dwarfed by the amount of new spending the $2.4 trillion debt ceiling increase will give.  In fact, if you use the high $25 billion number, one could say these cuts are negligible.  For if they spend that $2.4 trillion next year, the cuts will only be 1.03% of the new spending.  Or an additional $96.68 spent for each dollar cut.  Now, granted, my math skills may be outdated, but I think if you spend more than you cut while you already have a $1.6 trillion deficit, I don’t think you’re going to reduce the deficit.  But that’s just me using arithmetic.

$7 Billion is a little shy of the $4 Trillion in cuts S&P said would prevent Credit Downgrade

And this is what was important.  Deficit reduction.  To stop spending money we don’t have.  So the debt doesn’t rise so high that it threatens the full faith and credit of the United States.  As S&P warned would happen if we don’t make some serious spending cuts (see FreedomWorks Opposes Budget Control Act of 2011 by Jacqueline Bodnar posted 8/1/2011 on FreedomWorks).

“The deal has few immediate cuts totaling one half of one percent of the budget, with most savings coming in the later part of the decade,” commented Matt Kibbe, President of FreedomWorks. “How can we be serious about reducing the debt limit when we are not even talking about cutting programs like AmeriCorps and agricultural subsidies? This is not the serious reform Tea Partiers demanded last November.”

Standard & Poor’s has stated that anything less than $4 trillion in cuts will lead to an inevitable downgrade from the United States’ current AAA credit rating. “The ‘Cut, Cap, Balance Act’ is the only option on the table that would preserve the nation’s AAA credit rating and secure our long-term economic future,” added Kibbe. “

So S&P will downgrade the full faith and credit of the United States despite this deal.  So it doesn’t appear that the Republicans got much for that additional $2.4 trillion of spending.  So it would appear that the Democrats screwed the Republicans.  But that sure isn’t how some see it.

Ruthlessly dictating Terms to the Opposition is Okay as long as Liberals are doing the Dictating

In fact, some are spitting mad (see The President Surrenders by Paul Krugman posted 7/31/2011 on The New York Times).

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

Come on, Paul, tell us how you really feel.

And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts…

And even now, the Obama administration could have resorted to legal maneuvering to sidestep the debt ceiling, using any of several options. In ordinary circumstances, this might have been an extreme step. But faced with the reality of what is happening, namely raw extortion on the part of a party that, after all, only controls one house of Congress, it would have been totally justifiable…

In the long run, however, Democrats won’t be the only losers. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.

I don’t recall any such concern about the Democratic process that rammed Obamacare through the Congress along strictly party lines.  As bad as it is, the current deal was bipartisan.  Which is more than you can say about what Pelosi, Reid and Obama did with their health care bill.  Even the polls showed the people didn’t want it.  And many who voted for it paid the ultimate price at the next election. 

Apparently, ruthlessly dictating terms to the opposition is okay as long as liberals are doing the dictating.  In fact, liberals would be fine with doing away with the Democratic process if they held full power.  Let’s just hope they don’t resort to any legal maneuvering to make that happen.

The Sneaky Little Bastards are going to Escape those Spending Cuts and get their Tax Hikes

Liberals aren’t idiots.  They are very pragmatic.  And they’re liars and sneaks.  I think all this protesting is just smoke to make all the Tea Party Republicans think they’ve come out as winners in this deal.  Just take a closer look at the deal.  Negligible spending cuts up front.  A panel to determine future spending cuts (probably more heavily weighted on cuts that matter like out of control health care spending).  And a trigger for when that panel fails.  Which will make half of those future spending cuts come from defense.

And it gets better.  As this last round of negotiations has shown agreeing on spending cuts is next to impossible.  Even with the trigger those Medicare spending cuts are not likely to happen.  And with Obama just getting another $2.4 trillion to spend, that deficit isn’t going to get any smaller.  In fact, it’ll only get bigger.  Which means, of course, they will have no choice but to talk about revenue again (i.e., new taxes).  Say goodbye to the Bush tax cuts.  For they will let them expire next time.  Also, Obamacare kicks in after the 2012 election.  As do all those new taxes to pay for it.  More taxes upon more taxes.  Which is a lot of new taxes.

The sneaky little bastards are going to escape those spending cuts.  And get their tax hikes.  The Great Recession will linger on.  Or fall into full blown depression.  So it’s really clear who the winners and losers are in this debate.  The Ivy League liberal ruling elite are the winners.  And the American people are the losers.  As their country is transformed into a third world banana-republic.  Where the ruling elite at the top live very well.  And everyone else is poor and oppressed.  

Viva la Revolucion, El presidente.  Viva la Revolucion.

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Debt Ceiling Debate – The Beginning of the End

Posted by PITHOCRATES - July 31st, 2011

The Republicans will get Screwed

Politics is a murky business.  You hear a lot of sound bites from politicians.  And a lot of spin from the ‘objective’ media.  (I put ‘objective’ in quotes because it’s easier than writing that I’m winking.)  But you don’t know what’s going on behind closed doors.  What kind of deals they’re making. 

There’ve been a lot of news updates today on the negotiations to raise the debt ceiling.  From there was a deal to Nancy Pelosi saying the House Democrats may not support the Senate plan Harry Reid delivers.

So we don’t really know anything yet.  About the only thing we can know for certain is that the Republicans will get screwed.  As they always do in these types of deals.

Future Spending Cuts means no Spending Cuts

So what do we know?  Not a lot.  Word is that the Republicans are winning the tax hike fight.  There apparently will be no new taxes.  But they’re going to pay a steep price for that win (see Sen. Reid signs off on bipartisan debt-ceiling compromise by Alexander Bolton posted 7/31/2011 on The Hill).

It would cut about $1 trillion in spending up front and set up a select bicameral committee to put together a future deficit-reduction package worth $1.7 trillion to $1.8 trillion.

Failure of Congress to pass the future deficit-reduction package would automatically trigger cuts to defense spending and Medicare. An aide familiar with the deal said the Medicare cut would not affect beneficiaries. Instead, healthcare providers and insurance companies would see lower payments.

The last bipartisan agreement to cut spending happened over the negotiations to extend the Bush tax cuts last December.  And it was hell to agree on $100 billion in spending cuts.  And when the smoke cleared, that $100 billion was only about $30 billion.  So, yeah, I’m sure picking the $1 trillion in spending cuts will be easy-peasy with bipartisan love.  And no one will use the ‘taking hostages’ language like they did last December.

Future spending cuts?  Yeah, right.  You know what ‘future spending cuts’ mean in Washington?  No spending cuts.

And you couldn’t ask for worse triggers if you’re a Republican.  Gut defense spending?  It’s a dangerous world out there.  And most of the danger stays off our shores because the bad guys fear our military might.  Because our military protects and defends the United States against foreign enemies.  That’s in the Constitution.  One of the things the Commander in Chief is supposed to do.  But national health care isn’t.  And that’s where we’re heading with this trigger.

Provider reimbursements are already pushing providers out of Medicare.  This trigger will kill Medicare.  Which the proponents of Obamacare will love.  You can already hear the rhetoric.  “Oh, no.  Calamity.  Greedy providers dropping out of Medicare?  That’s just mean.  The government must step in and do something to provide for these seniors.  I mean, if no one else will provide for them then government should.”  And then Bob’s your uncle we have a national health service.

Health Care is easy when the Government runs It

And lest we forget the utopia of national health care, let’s take a look at a British newspaper (see NHS funding ‘moved away from poor areas’, says Labour posted 7/31/2011 on The Telegraph).

Changes to funding formulas means poor health rates will be given less consideration when cash is allocated, the party said.

It suggested areas like Manchester and the London borough of Tower Hamlets would lose out to parts of the wealthy south east, such as Surrey and Hampshire.

Labour based the claims on an assessment of funding reforms by public health bodies in Manchester.

But the government has disputed the allegations and claimed Labour’s figures were misleading.

Health care sure is a lot easier when government runs it.

This is the future that trigger gives us.  And if you thought the debate to raise the debt ceiling was bitter, you ain’t seen nothing yet.  The numbers will be bigger.  As will the stakes.  For they will be, after all, life and death. Who gets health care cash.  And who doesn’t.  And dies.

You know the Future is Bad when George Orwell’s 1984 is the Cheerful Option

When a deal is struck and the details come out, there’s a good chance the credit rating agencies aren’t going to be impressed.  Those future spending cuts are exactly the kind of thing they didn’t want to see.  So they will probably still downgrade U.S. sovereign debt.  Which will be a bitter pill to swallow.  After having to witness this farce.

So, without all the details available yet, here is my prediction.  Actually spending cuts will be less than $100 billion.  The credit rating agencies will downgrade the U.S. bond rating.  The trigger will activate the defense and Medicare cuts.  Defense spending will be gutted, leaving the United States the paper tiger it was at the end of the Vietnam War.  Medicare will collapse.  And Obamacare will morph into a full blown national health service.  Government spending will swell to beyond Greece levels.  There will be austerity riots.  Civil war.  Again.  And this experiment in self-government will come to an end.

Either that.  Or something more cheerful like George Orwell‘s 1984.

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LESSONS LEARNED #76: “You know they’re governing against the will of the people when they play with the meaning of words to fool the people.” -Old Pithy

Posted by PITHOCRATES - July 28th, 2011

When is a Spending Cut an Increase in Spending? 

I have a riddle for you.  When is a spending cut an increase in spending?  “Well, that’s when…, hey, wait minute,” you say.  “That’s not a riddle.  That’s a paradox.  It’s like saying draw a square circle.  Or a name an objective journalist.  You just can’t do these things.  Just as a ‘cut’ can’t be an ‘increase’.  They are the very opposite of each other.”

Yeah, you would think.  Not that much of a riddle, then, is it?  For a true riddle is solvable.  Or should be.  Like, say, I have two coins that add up to thirty cents.  One of them isn’t a nickel.  What are they?  You’re a bit stymied, aren’t you.  Because a quarter and a nickel are the only two coins that add up to thirty cents.  So what’s the answer?  A quarter and a nickel.  “But you said one of them wasn’t a nickel,” you say.  “Right,” I say.  “One of them isn’t a nickel.  But the other one is.”

Now that’s a riddle.  Clever.  But solvable.  So now back to my first riddle.  When is a spending cut an increase in spending?  The answer is when you use baseline budgeting.

The Power of Baseline Budgeting

Politicians lie.  And they love to spend our money.  Put the two together and what do you get?  Baseline budgeting.   Which in a nutshell is government spending on autopilot.  Next year’s spending is this year’s spending plus a little extra.  That ‘little extra’ is the amount in all budget negotiations. 

For example, let’s say there is an item in the budget with a billion dollar budget amount this year.  That’s the baseline.  That’s where we start budgeting for next year.  Next year’s budget will be one billion dollars plus or minus that ‘extra amount’.

Typically they set this ‘extra amount’ to be equal to or greater than the rate of inflation.  And/or changes in legislation for that budgetary item.  Let’s say there is no change in the program legislation.  And they set the program’s budget so that next year’s budget equals this year’s budget plus 10%.  So this budget item will be $1 billion this year.  And $1.1 billion next year.  Projecting this out for 10 years, this will automatically add $1.36 billion to this budgetary item.

In Baseline Budgeting a Spending Cut is an Increase in Spending

A couple of things should jump out at you.  For one you see why government programs never die.  Once they add them to the budget they stay in the budget.  And grow.  Always.  Forever.  And the bigger the starting budget amount the bigger the program will grow over time.  Again, automatically.  So you can see why baseline budgeting has been a godsend to Big Government.  It guarantees the growth of government.  Now.  And forever.

Now let’s look at a spending cut.  Let’s say spending is getting out of control.  Deficits are growing.  (As hard as that is to imagine.)  So there’s a budget deal to ‘cut’ the budget by 2%.  But this is a 2% cut in baseline budgeting.  So we’re not reducing the budget amount.  We’re only reducing the amount above the baseline.  Spending was going to increase 10% the following year.  But with this 2% cut, that 10% increase becomes only an 8% increase. 

This is where the language play comes in.  The budget is increased by 8%.  But in baseline budgeting it is a 2% decrease.  Instead of increasing the budget by $100 million, they only increase it by $80 million.  The budget is increased by $80 million but they count it as a $20 million cut.  Because future spending was cut $20 million.  So it’s a cut even though no spending was actually cut.  Spending still increases.  Just not as much as previously budgeted.  And that’s the wonderful world of baseline budgeting.  Where a spending cut increases spending.

The Government Shutdown of 1995 and 1996 

When CBO takes these projections out to 10 years it makes these spending ‘cuts’ look draconian.  As originally budgeted, this item would have been increased by $1.36 billion over 10 years.  Because of the reduction in the size of future spending, it will only increase $1 billion over 10 years.  But instead of calling this a $1 billion increase (which it is), they will call it a draconian cut of $359 million (which it isn’t).  Instead of saying this budget item will increase by 99.9% (which it will), they say it will be cut by 26.4% (which it obviously won’t).  Now politicians understand this baseline doublespeak.  But the average American doesn’t.  They hear ‘26.4%’ cut in some program for single mothers or hungry children and think what vicious, heartless bastards Republicans are.

And this was the stage for the government shutdown of 1995 and 1996Bill Clinton campaigned as a moderate in the 1992 presidential election.  After winning, though, he governed as a tax and spend liberal.  The people expressed their disapproval and gave both houses of Congress to the Republicans in the 1994 midterm electionsNewt Gingrich became Speaker of the House.  Gingrich and the Republicans saw their election as a mandate to stop the out of control government spending.  And that’s what they were trying to do in the budget battles beginning in 1995.

The Republicans were trying to reduce the rate of growth of government spending per the will of the people.  Spending would still increase.  But at a slower rate.  Clinton, though, fought against the will of the people.  Using baseline budgeting newspeak to mislead the people.  Clinton called these reductions in growth rates draconian spending cuts.  Even though there were no real cuts in spending.  But being a tax and spend liberal, he wasn’t about to cut the rate of growth.  So they squared off in budget battle.  It all came to a head when the government hit its borrowing limit.  The Republicans tried to get some spending cuts in exchange for increasing the debt ceiling.  Clinton refused.  Unable to pay its bills, the government shutdown.  And the United States collapsed.

Baseline Budgeting helps you Govern against the Will of the People

Not really.  Few people even noticed the shutdown.  Everyone still went to work.  Collected their pay (unless you worked in a national park).  And life went on.  Social Security checks went out.  Interest on the national debt was paid.  The credit rating on U.S. sovereign debt remained AAA.  So there was little damage.  Clinton came out okay from the crisis.  Newt Gingrich not so well.  Many believe that this helped Clinton’s reelection in 1996.  Of course a lot of that had to do with Dick Morris.  Who pulled Clinton to the center.  And became the moderate the people thought they elected.

Clinton may have won reelection, but he paid a price.   Republicans still held both houses of Congress.  Who ultimately won in the long-run.  Their Balanced Budget Act of 1997 did cut the growth rate of government spending.  And then the dot-com boom of the late Nineties produced a windfall of tax revenue that, with the ‘spending cuts’ of the Balanced Budget Act, actually balanced the budget.  For a few years.  But it turned out that the dot-com boom was actually a dot-com bubble.  Thanks to a lot of irrational exuberance.  And the bubble popped.  With the resulting recession tax revenue fell.  And those balanced budgets were no more.

Unwilling to concede to the will of the people, Clinton played with the meaning of words.  Called a spending increase a spending cut.  Because he knew the average American didn’t understand baseline budgeting.  And politicians continue to this day scaring people about draconian spending cuts where there are no spending cuts.  Not in the world of baseline budgeting.  Which makes it easy for them to continue to govern against the will of the people.  As they continue to do.  As they always have done.  Because nothing is more important than growing government.  And spending as much of our money as possible before we get a chance to spend it ourselves.

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A Debt Default and ‘no Social Security Checks’ only Scare Tactics in the Budget Debate to Raise the Debt Limit

Posted by PITHOCRATES - July 25th, 2011

A Summary of the Budget Debate to Raise the Debt Limit

One day making tracks in the prairie of Prax came a tax-raising Zax.  A tax-raising Zax.  And a spending-cuts Zax.  A tax-raising Zax.  And a spending-cuts Zax.  And it happened that both of them came to a place where they… *boom*  There they stood foot to foot.  Face to face.

“Look here, now,” the tax-raising Zax said.  “I say, you are blocking my path.  You are right in my way.  I’m a tax-raising Zax and I always raise taxes.  Get out of my way, now, and let me raise taxes.”

“Who’s in whose way?” snapped the spending-cuts Zax.  “I always cut spending making spending-cuts tracks.  So you’re in my way and I ask you to move and let me cut spending in my spending-cuts groove.”

Then the tax-raising Zax said with tax-raising pride, “I never have taken a step to one side.  And I’ll prove to you that I won’t change my ways if I have to keep standing here 59 days.”

“And I’ll prove to you,” yelled the spending-cuts Zax.  “That I can stand here in the prairie of Prax for 59 years.  For I live by a rule that I learned as a boy back in spending-cuts school.  Never budge that’s my rule, never budge in the least.  Not an inch to the west, not an inch to the east.  I’ll stay here not budging, I can and I will.  If it makes you and me and the whole world stand still.”

(The Zax, from The Sneetches and Other Stories by Dr. Seuss, slightly modified)

Spending worries most Americans

If neither Zax is moving, at least there’s no spending.  And it appears that it is the spending that worries most Americans.  Based on the polling.  Which shows the spending-cuts Zax gaining support (see GOP has 10-point edge on Democrats in public trust on economic issues in latest Rasmussen Reports national survey by Mark Tapscott posted 7/24/2011 The Washington Examiner).

Republicans have gained a 10 point lead over Democrats in Rasmussen Reports latest national survey on who the public most trusts to deal effectively with economic issues.

The 10 point lead is the widest margin held by either party in months and has opened up in recent weeks as President Obama and House Speaker John Boehner have become the central players in the debate over how to deal with the approaching debt-ceiling crisis.

It seems pretty clear.  The people want the tax-raising Zax to take a step to the spending-cuts side.

You can’t Fool the Bond Market

And while one Zax stands foot to foot with the other Zax, not budging, the bond market is not all that worried.  Which is kind of odd being that they hold the debt that Obama, Geithner, Pelosi, Reid, etc., warn they may default on (see U.S. bond market: Watching and waiting by Ben Rooney posted 7/25/2011 on CNN Money).

As policymakers in Washington continue to butt heads over the debt ceiling, the response in the bond market Monday was relatively subdued…

…many bond market watchers suggested that stocks are more vulnerable to the ongoing debt ceiling drama. By contrast, some say Treasuries could actually benefit from a flight to safety if the debt ceiling isn’t raised.

This seems counterintuitive.  Especially with all of the dire predictions coming out of Washington.  But it turns out that you can’t fool the bond market.

Another reason why Treasuries have held their ground is that a default would not necessarily result in huge losses for holders of U.S. debt. Treasury would probably have to furlough workers and make other adjustments if the debt ceiling is not raised, but analysts do not expect it to immediately miss interest payments on the federal debt.

The money is there.  Some money.  Tax revenue is still making it to Washington.  Almost $200 billion each month.  The bond market knows this.  They’ll get their interest payment.  Still, there could be some fallout from a downgrading of U.S. debt. 

…many institutional investors, including money market funds and pensions, are required to hold only AAA-rated securities. If the U.S. government is downgraded, those funds may be forced to dump billions worth of U.S. paper.

This could wreak a little havoc.  But probably no more than a downgrade due to the lack of resolve to restrain out of control spending which is the root cause of all these budget problems.  One way or another, we have to cut spending to ultimately calm the bond rating agencies.

Businesses are more Worried about the Tax Code

And they aren’t that worried in corporate America either (see Analysis: CEOs count on cash to cushion default risk by Scott Malone posted 7/25/2011 on Reuters).

Bankruptcy attorney Martin Bienenstock, of Dewey & LeBoeuf LLP, said it seemed like most business people were dismissing the likelihood of a default

“People still don’t think there is going to be an actual default,” Bienenstock said. “There doesn’t seem to be any domino effect brewing yet with the concept of ‘rates will rise and companies on the brink will fail and things like that.'”

If the U.S. runs out of money it is more likely that there will be a partial government shutdown.  Not a default.  And, to be frank, there isn’t a lot these businesses need from government.  Other than a simplified tax code.

While businesses would balk at paying higher taxes, CEOs have said that what they want right now is to have the tax debate settled so they know what they will be paying in taxes.

A government unable to pay its bills won’t affect them.  But not knowing what their taxes will be will.  Because the government shakes them down for a lot of money.  And they have to plan accordingly.  Like having a forklift and other heavy-lifting equipment available to lift those vast sums of cash.

Social Security Checks will go out Regardless

It would appear that most aren’t falling for the scare tactics of Obama and the Democrats.  But what about the seniors?  Will they get their Social Security checks?  Team Obama has been playing this card every chance someone places a microphone in front of them.  So what about Social Security?  Should seniors worry about not getting their checks?  As it turns out, no (see Contrary to the President, Social Security Checks Are Not At Risk by Michael McConnell posted 7/23/2011 on Advancing a Free Society).

The Social Security trust fund holds about $2.4 trillion in U.S. Treasury bonds, which its trustees are legally entitled to redeem whenever Social Security is running a current account deficit. Thus, if we reach the debt ceiling…, this is what will happen. The Social Security trust fund will go to Treasury and cash in some of its securities, using the proceeds to send checks to recipients. Each dollar of debt that is redeemed will lower the outstanding public debt by a dollar. That enables the Treasury to borrow another dollar, without violating the debt ceiling. The debt ceiling is not a prohibition on borrowing new money; it is a prohibition on increasing the total level of public indebtedness. If Social Security cashes in some of its bonds, the Treasury can borrow that same amount of money from someone else…

President Obama is therefore wrong when he says that failure to raise the debt ceiling might result in not sending out Social Security checks. Many bad things might happen, but not that.

Interesting.  So Social Security checks will go out.  Automatically.  Even if the current account is in deficit.  Because of that glorious trust fund stuffed with treasury securities.  In fact, the only way checks won’t go out is if Obama prevents this automatic mechanism to score some political points by falsely blaming Republicans.  Which will be risky.  Because people will eventually learn the truth.  If they don’t know it already.

The Tax-Raising Zax needs to Step to the Spending-Cuts Side

The tax-raising Zax had better learn to swallow his tax-raising pride and however reluctantly he should now take that first step to the spending-cuts side. 

For the people and the bond market and businesses agree.  The problem is spending.  Much too much spending as you must by now plainly see.

And leave our seniors alone and frighten them not with horrors of checks that won’t come their way.  For the trust fund is brimming with securities aplenty that can be cashed to pay all promises made without delay.

Unless Social Security has been a big Ponzi scheme all along.

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The Republicans and the Credit Rating Agencies believe it’s a Debt Crisis, not a Revenue Problem

Posted by PITHOCRATES - July 23rd, 2011

The Crisis of the Debt Crisis Negotiations

It’s near crunch time.  When something has to happen.  Something.  Good.  Or bad.  But the politicians aren’t playing nice.  And the pundits are opining (see Reactions to the impasse posted 7/23/2011 on First Read).

Andrew Sullivan: Republicans are anarchists.

David Frum: The Republicans made the debt problem a debt crisis.

Jay Cost: Obama is a lot like Jimmy Carter.

Ezra Klein: John Boehner is purposely wasting time by making non-offers.

Over on the New York Times, Paul Krugman is calling it Naked Blackmail (posted 7/23/2011). 

It turns out that in the final stages of the debt negotiations, Republicans suddenly added a new demand — a trigger that would end up eliminating the individual mandate in health care reform.

…the health care mandate has nothing to do with debt and deficits. So this is naked blackmail: the GOP is trying to use the threat of financial catastrophe to impose its policy vision, even in areas that have nothing to do with the issue at hand, a vision that it lacks the votes to enact through normal legislation.

Which is one side of the story why Boehner walked out of the negotiations.  For another side you can read Why the Obama-Boehner talks fell apart by Keith Hennessey (posted 7/23/2011).

The President backtracked in private negotiations this week, demanding bigger tax increases after the Gang of Six, including three conservative Republican Senators, released a plan that raised taxes more than the President had previously demanded…

…the President retreated from an earlier position on taxes as a result of the Gang of Six introducing their plan. On total tax revenues, tax rates, and refundable outlays, the President increased his demands last week.

And then there’s the unfunded mandate.

…the President and the Speaker had open disputes about how much to save from Medicaid, and about an automatic mechanism to force Congress to act on the entitlement and tax provisions. The President wanted a provision that would “decouple” tax rates if Congress failed to act, allowing top tax rates to increase while extending the other tax rates. Republicans would hate this outcome and would therefore have an incentive to legislate the deal. The Speaker insisted that if this automatic hammer decoupled tax rates, it also had to repeal the individual mandate from the Affordable Care Act (ObamaCare), to create roughly equal legislative pressure on both sides of the aisle.

So there’s a lot more to the story some people are leaving out in their condemnation of Speaker Boehner and the Republicans.  For it would appear that it’s Obama and the Democrats who are refusing to make a deal that cuts spending or doesn’t raise taxes.  And it’s Obama that’s been increasing his demands.  With an able assist from the Gang of Six.

The Debt Rating Agencies siding with Boehner and the Republicans

But are Boehner and the Republicans just partisan mad men?  Making mountains out of molehills?  Debt crises out of debt problems?  Guess it depends on who you talk to.  If you talk to partisans on the left, yes.  If you talk to credit rating agencies, no (see Egan Jones cuts US rating, cites high debt load by Karen Brettell posted 7/18/2011 on Reuters).

Credit rating agency Egan-Jones has cut the United States’ top credit ranking, citing concerns over the country’s high debt load and the difficulty the government faces in significantly reducing spending.

…the cut is due the U.S. debt load standing at more than 100 percent of its gross domestic product. This compares with Canada, for example, which has a debt-to-GDP ratio of 35 percent, Egan-Jones said in a report sent on Saturday.

And S&P is getting closer to following suit (see Obama officials clash with S&P over downgrade threats by Tim Reid and Rachelle Younglai, Reuters, posted 7/23/2011 on Yahoo! News).

Since October, S&P has accelerated its deadline three times for when it might downgrade the United States’ coveted AAA credit rating as efforts in Washington to reach a deal on cutting long-term deficits have faltered.

The U.S. is in very dangerous debt territory.  Even Al Jazeera is writing about the severity of this debt problem (see Obama launches crisis talks over US debt posted 7/23/2011).

The US government now owes $14.3tn, which is its current legal limit, and is more than the size of the economies of China, Japan and Germany put together…

The largest US creditor, China, has twice warned that the US must protect investor interests, as ratings agencies Moody’s and Standard & Poor’s have said the sterling Triple-A US debt rating was in danger of a downgrade.

You know your debt is bad when it exceeds the sum of three of the largest economies in the world.  At least you should know.  That’s why the rating agencies are looking at downgrading American sovereign debt.  The debt problem is that bad.  And tax hikes without spending cuts will only make this very bad problem much, much worse.  Because it’s a debt problem.  Not a revenue problem.

And, yes, the high costs of Obamacare need to be included in this conversation.  Because it is a BIG part of the spending problem.

From Sea to Shining Sea, at Least for awhile Yet

Raising the debt ceiling is not the problem here.  It’s the amount of debt that’s the problem.  Whatever happens in the next few weeks the United States will survive.  But it will not be able to survive the long term explosion of spending (in particular on health care) and debt.  Which is the thing that is making the rating agencies nervous.  As well as the rest of the world.

In the grand scheme of things, it would appear that Boehner and the Republicans are trying to do the right thing.  Whereas Obama and the Democrats are merely looking for short-term political gain.  Which is not in the best interests of the country.  But they’re not worried.  For whatever becomes of America, they are certain that they will be ensconced in their liberal Democrat city-states.  Insulated from the surrounding ruins that they will simply refer to as flyover country.

So much for “from sea to shining sea.”

www.PITHOCRATES.com

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A Neutered American Lapdog is Advancing Agenda, not Reporting News

Posted by PITHOCRATES - July 22nd, 2011

Dirty Journalists keep Politicians Clean

Poor Rupert Murdoch.  He’s getting no love from the British Establishment over the phone hacking scandal.  Those who once courted the “feral beast” (British tabloids) are turning against it.  Probably because the other political party wooed them more successfully.  And if you’re in politics, you want them on your side.  Because they’re good at their jobs (see In Defense of Hacks by Toby Harnden posted 7/21/2011 on Foreign Policy).

Whereas our American counterparts have long viewed themselves as comparable to lawyers and doctors, we British hacks still see ourselves as practitioners of a grubbing craft rather than members of an upstanding profession. (The public, which views us as on a par with real estate agents, prostitutes and perhaps even criminals, tends to agree.)

Yes, they’re less Walter Cronkite and more Louie De Palma (a character on the American sitcom Taxi).  For a good journalist knows how to get dirty.  Like Louie, a good journalist is born dirty.

While the American press has certainly had its share of similar disgraces, it is true that American newspaper articles are in the main more accurate and better-researched than British ones; the Rupert Murdoch-owned Wall Street Journal was not wrong when it ventured that Fleet Street has “long had a well-earned global reputation for the blind-quote, single-sourced story that may or may not be true.” But stories in the American press also tend to be tedious, overly long, and academic, written for the benefit of po-faced editors and Pulitzer panels rather than readers. There’s a reason a country with a population one-fifth the size of that of the United States buys millions more newspapers each week.

For all their faults, British “rags” are more vibrant, entertaining, opinionated, and competitive than American newspapers. We break more stories, upset more people, and have greater political impact.

That’s the way American journalism was before the Political Class co-opted it.  And why ordinary Americans once read newspapers.  To keep an eye on the scoundrels we put into elected office.  It was one of the few things that kept our elected officials somewhat honest.  Or, at least, honest enough not to lose the next election.

In fact, for the British press, the most damaging revelation of the phone-hacking scandal is the degree to which it shows that journalists — or, to be more precise, News International executives — breached the inner sanctums of the British Establishment. A breed that had always taken pride in being made up of grubby outsiders was allowed in and made the most of the opportunity.

In the United States, journalists are already on the inside: Witness President Barack Obama’s private chats with op-ed columnists, the Washington Post and Time magazine types who effortlessly segue into White House press secretaries and the cozy consensus of Washington’s political-journalism-industrial complex. All too often, American editors, perhaps mindful of their future cocktail party invitations, would prefer their reporters stroke rather than stick it to authority. British journalistic excesses can rightly be condemned, but the American media could use a few more of them. It took the National Enquirer to bring Senator John Edwards to book — and Fleet Street would not have stood for the credulous U.S. reporting on the Bush administration that characterized the run-up to the Iraq war.

That’s the last thing you want.  Your journalists getting all warm and cozy with the people they’re supposed to keep honest.  You don’t want the media to be an adjunct of one party, following orders to advance an agenda while launching personal attacks on the other party.  A good journalist should hate all political authority equally.  And show no favoritism when destroying political careers.  

It is the very politicians who used every opportunity to ingratiate themselves with Murdoch and his acolytes who are now those calling for News International to be broken up — and for the media as a whole to be called to account. Their aim? A regulation system — probably headed up by new a government-appointed “independent” body — that produces a neutered press close to the American model. Having visited Washington and seen reporters stand up when the American president enters the room (British hacks do no such thing for the prime minister) and ask respectful, earnest three-part questions, no wonder our politicians would want more of the same.

The danger of the fevered atmosphere in Britain — where justified outrage over tabloid tactics is fast leading to a hasty public inquisition, with 10 official inquiries or investigations underway at last count — is that what Prime Minister Tony Blair once termed the “feral beast” of the media might be tamed and muzzled. Perhaps the worst outcome of all would be for it to be turned into an American-style lapdog.

If you want to learn about American politics (or journalism) read a British newspaper.  The British Establishment hates and fears them.  Because they do their job.  Whereas in America, the Political Class only hates and fears FOX NEWS and talk radio (Rush Limbaugh, Sean Hannity, etc.).  Which tells you where to go to get your news.  Because if you want objective reporting, you have to go where they dare to be unflattering.  Unlike the sycophants in the ‘mainstream’ media.  For an unneutered feral beast is the only thing that will go for the political jugular.  And restrain the excess of our elected scoundrels.  I mean representatives.

And sometimes you need to get dirty.  Because getting dirty is sometimes the only way to keep politicians clean.

Good Journalism is more Reporting and less Stroke

If you watch FOX NEWS or listen to talk radio you’ll hear a different ‘version’ of the news than that on the mainstream media.  For example, the mainstream media has reported repeatedly polls citing that Americans want the Republicans to stop being intransigent and raise taxes already so the budget deal to raise the debt limit can move ahead.  Interesting how that ‘report’ meshes perfectly with the Obama administration policy agenda.  And yet Rasmussen reports a completely contrary poll finding (see Most Voters Fear Debt Deal Will Raise Taxes Too Much, Cut Spending Too Little posted 7/22/2011 on Rasmussen Reports).

The latest Rasmussen Reports national telephone survey finds that 62% of Likely U.S. Voters are worried more that Congress and President Obama will raise taxes too much rather than too little in any deal to end the debt ceiling debate. Just 26% fear they’ll raise taxes too little. Twelve percent (12%) aren’t sure. (To see survey question wording, click here…)

There’s a wide difference of opinion, however, between the Political Class and Mainstream voters. Fifty-nine percent (59%) of the Political Class is worried the deal will cut spending too much, while 63% of Mainstream voters fear it won’t cut spending enough. Those in the Mainstream worry more than Political Class voters by a near two-to-one margin – 70% to 37% – that the debt deal also will raise taxes too much.

It sounds like ordinary Americans don’t want higher taxes and more spending.  In fact, they are worried that any deal may raise taxes too much or cut spending too little.  Now this opposes the Obama administration policy agenda.  So I wonder which journalism is more reporting and less stroke?  And which is truer?

Entitlement Spending is the Cause of all our Budget Woes

Americans should be worried about raising taxes instead of cutting spending.  Because there is a much bigger problem out there (see Missing the Debt by Yuval Levin posted 7/21/2011 on The Corner).

…starting in the 2050s, CBO projects that health-care spending will be greater than all other non-interest spending combined, and the federal government will basically be a health insurer with some unusual side ventures like an army and a navy.

…health-care entitlement spending is basically 100 percent of our medium and long-term debt problem.

That thing that Obama and the Democrats refuse to put on the table?  Entitlement reform?  Especially all the health care programs (Medicare, Medicaid and now Obamacare)?  They’re the cause of all our budget woes.  Ignoring this fact makes the budget debate pointless.  It’s just political theatre.  Fiddling while America burns.  Pity we don’t have an unneutered feral beast to put this issue front and center.  Besides FOX NEWS and talk radio, that is.

FOX NEWS will Report what the Political Class rather you not Hear

Interestingly, FOX NEWS is part of the Rupert Murdoch Empire.  And those on the left viciously belittle it as not being ‘real’ news.  But they sure incur the wrath of the Political Class.  Which should tell you a thing or two.  Because when it comes to news organizations, they only hate those who report things they’d rather you not hear.

Of course there is a chance that the FOX NEWS isn’t a legitimate news organization.  And that they are only reporting inflammatory pieces to make a buck.  And that the Political Class is pure and innocent as the winter’s snow.  That everything they do is for our own best interests.  Being the honest public servants that they are.

Yeah, right.  Pull the other.

www.PITHOCRATES.com

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