QUOTE OF THE DAY
Points and Figures: The Debt Crisis
America is on a bullet train to debt hell. The numbers speak for themselves. This morning, on the Mike And Gina Show we had a discussion about debt. Using positive economics to describe debt is useful. Debt by itself is neither “bad” nor “good”.
Debt is just a way to leverage growth. Businesses use debt all the time. They also use cash, and equity. Debt is just an arrow in a quiver to stimulate growth. In times of war, the US would not have survived if not for the use of debt. The Revolutionary War would not have been fought had the US not persuaded countries to purchase debt obligations. World War Two saw a massive increase in debt/GDP ratios, but we were fighting for our survival as a country.
The federal debt is simply a claim on the future tax revenues of the United States. The fact is, the US government and the US citizen owns around 80% of the outstanding US debt. China owns around 8%. If the US economy grows fast enough, debt can be retired at a nice pace, limiting its impact on American lives. If the US economy doesn’t grow at a fast enough pace, debt becomes a drag on American lifestyles because tax revenues are used to pay off the outstanding debt.
Financial Times: Illinois lawmakers fall into pensions gap
After the previous legislature failed to pass crucial fiscal reforms, Illinois’ new lawmakers sworn in this month have been handed a huge problem: how to close a $96bn unfunded pension liability.
A Moody’s downgrade last year gave Illinois the lowest credit rating in the nation and Fitch downgraded its outlook to negative last week on pension reform inaction. After years of short-changing public pension funds, filling the pensions gap will be difficult, with state and local tax revenues amounting to only about $55bn.
“This is not an opportunity in search of a crisis, this is a crisis in search of a leader [and] a reasonable compromise by our government,” said Laurence Msall, president of the Chicago-based budget watchdog group The Civic Federation.
Illinois’ pension system is just 35 per cent funded, according to Boston College’s Center for Retirement Research. A “healthy” pension system, meanwhile, is generally defined as being 80 per cent funded. In 2010, 34 states were below the 80 per cent threshold, up from 31 states in 2009 and 22 in 2008.
In fiscal 2010, the most recent data available for all states, the state pension gap in the US hit $757bn, according to a report from the Pew Center on the States. That figure nearly doubles, to $1.38tn, with the inclusion of retiree health benefits.
Yahoo! News: US taps pension fund to avoid passing debt limit
Treasury Secretary Timothy Geithner says the government has begun borrowing from the federal employee pension fund to keep operating without surpassing its debt limit.
Geithner says in a letter to congressional leaders that the move will free up $156 billion in borrowing authority while Congress debates increasing the $16.4 trillion debt limit.
The government reached its borrowing limit on Dec. 31, but began using bookkeeping maneuvers to keep from surpassing it. Geithner has told congressional leaders that Treasury expects to exhaust those measures by mid-February to early March.
The latest action has been taken by other Treasury secretaries and will not put in jeopardy any monthly pension payments. Geithner said he will replace the funds removed from the pension account after the borrowing limit is raised.
CNBC: Uncle Sam’s 'F' Rated Bonds
Were the United States any other country, its bonds would have long ago been downgraded to junk.
The national debt is careening out of control, and the underlying economy appears unable to support the taxes necessary to stabilize the amount owed. The political class has sunk into tragic dysfunction, incapable of civil discourse or creative thinking to address these problems.
In 2007, the last full year before the financial crisis, the federal deficit was only $161 billion but since, spending on health care, social security and other entitlements have exploded—the annual budget gap has exceeded $1 trillion for five years.
Gov. Brown’s budget is a boon to California unions
Gov. Jerry Brown continues to pose as an iconoclast who is willing to make the tough choices necessary to keep California afloat, but the budget he released recently is more evidence that he remains the cat’s paw for the state’s public-sector unions.
“I want to advance the progressive agenda,” Brown said at the press conference unveiling his supposedly balanced budget, “but consistent with the amount of money people made available … I respect and embrace my role of saying ‘no.’”
But he certainly has said yes to union demands. The budget is the culmination of Brown’s campaign to convince Californians to raise taxes on themselves. They complied by approving Prop. 30 to help the school kids, yet Brown has played games with that money—earmarking some of it for union pay hikes as a payback for all that help during the Nov. 6 campaign, according to GOP leaders.
But the biggest problem is the budget’s unbelievable refusal to grapple with the tsunami of debt cascading toward Sacramento. For the past decade, California officials have been ramping up pay and benefit packages for public employees, creating a level of enrichment that is almost hard to believe.
Daily News: Bernanke missed signs of crisis
They didn't see it coming.
Federal Reserve officials were largely blindsided as the financial crisis hurtled toward the U.S. economy like a freight train in 2007, according to newly released transcripts.
Even as they fretted over the health of the financial markets and growing evidence of a mortgage meltdown, central bankers seemed clueless that year to the extent of the havoc it would eventually wreak.
“The odds are that the market will stabilize,” Fed Chairman Ben Bernanke told the committee in August 2007, according to the transcripts, which are released each year with a five-year lag.
William Poole, president of the Federal Reserve Bank of St. Louis, echoed his sentiments at the meeting, saying, “My own bet is that the financial market upset is not going to change fundamentally what’s going on in the real economy.”
Doomed investment bank Bear Stearns had already had to rescue two hedge funds crushed by subprime mortgage loans by then, foreshadowing its near collapse.
MarketWatch: Social Security teetering on the ‘debt cliff’
The fiscal cliff may be behind us, but the "debt cliff" looms ahead.
That's the federal debt ceiling that Congress must raise in the next four to eight weeks, or have the U.S. fail to pay its bills. Some in Congress demand spending cuts that equal any increase in the debt ceiling; some seem willing to risk default.
Programs on the block include Medicare, Medicaid, and Social Security. For Social Security, two dangers surface.
The first danger is short-term, affecting current retirees. If Congress fails to raise the debt ceiling, some experts say all federal outlays — including monthly Social Security checks — are jeopardized. At press time the Administration is warning that without spending authority, Social Security and veterans' payments could be delayed until tax revenue trickles in, or simply be slashed.
For some, a delay or reduction would be an inconvenience. For millions of others who rely on Social Security for most or all of their income, it would be immediate disaster. There would be no money for rent, heat, or food.
CARTOON OF THE DAY