Wednesday, April 27, 2011

Surge of Unsettling News Foreshadows Crisis Ahead

If you've been paying attention lately, you've surely noticed the steady flow of rather stunning developments portending great disruptions and dislocations for the US and global economies.

It's difficult to know where to begin.

Robert Zoellick, the president of the World Bank, has warned that the world is "one shock away from a full-blown crisis".

It doesn't require a whole lot of imagination to figure what any one of those shocks might be: high unemployment, rising global food prices, rising global oil prices, an unstable global banking system and/or unsustainable sovereign debts.

While much of the focus has been on the European sovereign debt crisis, the US has its own developing debt crisis which is finally getting the world's attention.

The IMF says the US budget deficit in 2011 is expected to hit 10.75 percent of national output, the highest among the developed nations.

Consequently, last week Standard and Poor's cut its ratings outlook on the US to negative from stable. It was a stunning development since it is the first time S&P has ever lowered its outlook for the US from "stable".

The rating agency effectively gave Washington a two-year deadline to enact meaningful change or face the consequences; an actual downgrade from its long term, top-notch AAA rating. As of now, the US remains one of 19 sovereign governments rated AAA by S&P, out of 127 rated countries.

A downgrade would push up interest rates on Treasurys, raising the cost of borrowing for a government that already can't afford its bills. It would also push up rates for businesses and consumers, creating a further drag on an already sluggish economy.

The US debt is just shy of the $14.294 trillion federally mandated cap. Congress is essentially damned whether it does, or does not, elect to raise that debt ceiling. The US has the ugly choice of sliding further into perilous, intractable debt, or defaulting and living through the ensuing chaos.

The writing has been on the wall for quite some time and the consequences of are already occurring.

Bill Gross, a founder of Pacific Investment Management Co., manager of the world's biggest bond fund, dumped US government-related holdings in February and began shorting them in March.

“There is really no way out of this [debt] trap and this conundrum at this point,” says Gross.

That seems to be the growing consensus.

Last week, the People's Bank of China announced that the country's excessive stockpile of US dollar reserves has to be urgently diversified. China's foreign exchange reserves included more than 3 trillion in US dollars at the end of March.

Subsequently, the Xinhua news agency reported the following:

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

This indicates that China plans to "diversify" (read: liquidate) itself of $1 trillion in US holdings. Of course, this will occur over time. But it is bad news for the US nonetheless.

It is the exact opposite of what the US is seeking. It needs buyers, not sellers.

Then, at a time when the US didn't need any more bad news, the IMF just dropped a major bombshell: It forecast that China’s economy will surpass that of America in real terms in 2016 — just five years from now.

This is a positively stunning development. For most of the past century, China was an impoverished Third World nation. Then last year it vaulted past Japan to become the world's second biggest economy. In the process, it also became the world's biggest car market.

And now it is poised to surpass the US. When such an event unfolds, the US will lose its vaunted status as the world's reserve currency, and all of the privileges that come with that.

The key requisite for any economy to grow is energy — specifically oil — which is becoming increasingly difficult to recover. As a finite resource, the supply of oil is limited. However, the demand for oil is relentless and perhaps infinite.

However, the International Energy Agency (IEA) recently warned that, "The age of cheap energy is over."

Here's the kicker:

IEA analysts said the world needs another 50 million barrels of oil from new fields by 2035 in order to meet expected demand. Crude oil production from existing fields, meanwhile, is expected to decline from the 68-million-barrel-per-day mark in 2009 to just 16 million bpd by 2035.

Let's break this down:

Global oil production is expected to decline by nearly 77%. Yet — within just 24 years — the world must somehow find about 74% more oil than it is currently consuming, even though 77% of current supplies are expected to be exhausted.

Got that? Does that make any sense to you at all? Me neither. That's because it simply makes no sense whatsoever.

If you're feeling unnerved by this litany of sobering, downright scary news, you should be. It's ugly. It's freaky. And it's real.

What you do with all of this is up to you. But, by all means, you should do something well-planned because the unsustainable clearly cannot, and will not, continue.

Tuesday, April 19, 2011

US Taxes Among Lowest In World

And They're Starving The Budget

According to a new report by the Organization for Economic Cooperation and Development (OECD), the burden on U.S. taxpayers is just about the lowest in the developed world.

The Paris-based group, which tracks the economies of 34 developed countries, found that though America's top rate is 35 percent, a typical married couple with two kids pays just 13.7 percent of total income in taxes, down from about 20 percent in 2000.

Meanwhile, the average rate among the 34 OECD nations for similar households was 26 percent.

The OECD has been compiling data on government taxes among member countries since 1965. All figures were for 2009.

However, many European countries also impose a Value Added Tax — a kind of sales tax on a wide variety of goods and services. Denmark's 25 percent VAT is the highest in Europe.

Though many Americans think their taxes are too high, federal revenues are now well below the 18 percent historical average.

Revenues plunged from their peak of $2.57 trillion in 2007 to reach $2.1 trillion, or 14.8 percent of economic output in 2009 — the lowest level since the 1950s — and taxes remain that low today, according to the Congressional Budget Office (CBO).

Those revenues are not sufficient to support a federal government that is waging two wars and funding the healthcare costs of the retired and disabled.

Including federal, state and local taxes, the total U.S. tax burden is 24 percent of GDP.

For comparison's sake, the total tax burden in Demark consumes some 48 percent of that country's GDP; Swedes pay 46 percent of GDP in taxes; in France, 42 percent goes to the tax man and Germans pay 37 percent. Canadians (31 percent), Japanese (28 percent) and Australians (27 percent) also have a higher tax burden than Americans.

The OECD says the total weight of taxes on the U.S. economy is at the lowest levels since the 1960s.

In fact, only two OECD countries devote a lower share of GDP to taxes than the United States — Chile (18.2 percent) and Mexico (17.5 percent).

This is worrisome since, as the OECD notes, the U.S. is the only major developed nation that has allowed tax levels to fall so low despite creating dangerous and potentially destabilizing deficits and debt burdens.

Just yesterday, Standard & Poor's cut its ratings outlook on the U.S. to negative from stable, effectively giving Washington a two-year deadline to enact meaningful change.

Phasing out the Bush tax cuts would bring revenues back in line with historical norms.

However, the CBO estimates that extending all the cuts set to expire at the end of 2012 — primarily the Bush-era tax cuts — will add another $4.6 trillion to the national debt in the next decade.

The House Republican budget would add to the problem by cutting taxes another $4.2 trillion over the next 10 years.

Conservative icon David Stockman, who was White House Budget Director for President Reagan, says the Republicans are "totally out to lunch."

“I think the biggest problem is revenues. It is simply unrealistic to say that raising revenue isn’t part of the solution. It’s a measure of how far off the deep end Republicans have gone with this religious catechism about taxes.”

Famous deficit hawk and fiscal conservative Pete Peterson concurs.

“Any viable plan must include both spending cuts and revenue increases,” he said.

That's a choice that lawmakers now have to make. The nation has a burgeoning crisis on its hands and any adherence to a strictly anti-tax doctrine will ultimately be self-defeating and ruinous.

Monday, April 18, 2011

45% of U.S. Households Paid No Federal Income Tax For 2010

Happy Tax (Avoidance) Day!

Today is tax day for millions of Americans. However, for a nearly half of American households, this day means nothing at all.

That's because they won't be paying a dollar, or even a dime, to old Uncle Sam.

Due to an array of tax breaks, credits, write-offs and deductions, 45 percent of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank.

It's little wonder we have such a deficit problem.

Politicians have used the tax code to serve a wide array of special interests, including Americans at virtually all income levels. The wide variety of tax breaks are very popular and generate votes for incumbents, which makes changing the complex and cumbersome tax code very difficult.

Tens of millions of Americans get tax breaks for home mortgage interest, college tuition, having children, making charitable donations and for deducting state and local income taxes, plus sales taxes.

The vast majority who escape paying federal income taxes have low to medium incomes. However, these people still pay Social Security and Medicare taxes, plus property and retail taxes.

As of 2007, more than half of the federal government's tax revenue came from the top 10 percent of earners. And more than 44 percent came from the top 5 percent of earners.

However, the wealthy have access to more lucrative and numerous tax breaks. Though the top rate is 35 percent, millions of wealthy Americans pay far less.

According to 2007 IRS data (the latest year available), the 400 highest adjusted-gross-income households in the U.S. paid an average federal tax rate of just 17 percent, down from 26 percent in 1992.

According to the National Taxpayer Advocate, an independent watchdog group within the IRS, all of the tax credits, write-offs and deductions legislated into the tax code result in a loss of $1.1 trillion to the federal government each year. That's an average of about $8,000 per taxpayer.

Keep in mind, last year's federal deficit was $1.3 trillion.

As I've noted on this page many times before, the federal government doesn't just have a spending problem; it also has a revenue problem.

The wars in Iraq and Afghanistan were never funded. They're being fought with borrowed money. The same is true for the Medicare Prescription Drug Act.

Due to high unemployment and lower incomes and wages, tax revenues have fallen to 15% of GDP, down from the historical average of !8% of GDP. As a share of GDP, income tax revenues are at their lowest level since 1951, when Harry S. Truman was president.

The government must correct this and return to the historical average, plus cut spending, just to reign in the deficit and balance the budget.

Yet, even if this is done, it won't even begin to address the $14 trillion national debt.

But, hey, we've got to start somewhere.

Wednesday, April 13, 2011

Deficit Reduction Plans Will Not Solve Debt Crisis

Gross federal debt is now about 100 percent of gross domestic product, the highest level since immediately after World War II.

The problem for the US is that our annual budget deficits, which add to that debt, show no signs of abetting for decades to come.

Economists typically agree that in order for a nation to remain on a stable fiscal footing, its deficit should not exceed 3 percent of gross domestic product (GDP).

However, according to the IMF, the US budget deficit for fiscal 2011 is expected to hit 10.75 percent of national output, the highest among the developed nations.

This seems to have finally spooked Washington.

Today, President Obama called for $4 trillion in deficit reductions over the next 12 years. To achieve those reductions, Obama said $2 trillion should come from spending, $1 trillion from overhauling the tax system to eliminate some tax breaks and loopholes, and the rest from lower interest payments on the national debt.

It is unclear, to me at least, how the president plans to lower interest payments, or how they can be controlled in any way as long as annual deficits continue.

The President's plan calls for $770 billion in cuts to domestic programs, $480 billion in savings from Medicare and Medicaid, $400 billion in cuts to military spending by 2023 and $360 billion in cuts to mandatory programs such as agricultural subsidies.

Though it is not counted in his $4 trillion deficit reduction plan, Obama also wants to allow the Bush-era tax cuts to expire for individuals making at least $200,000 a year and for couples making at least $250,000 annually. That group amounts to 2 percent of the US population.

Last week, House Republicans, led by Rep. Paul Ryan of Wisconsin, unveiled their own budget for the 2012 fiscal year and beyond. It would cut $6 trillion over 10 years, mostly from projected spending for Medicare and Medicaid. However, those savings would be offset by about $4 trillion in tax cuts. The result, according to the Congressional Budget Office, would be continued annual deficits until 2040.

So the more aggressive Republican plan still allows deficits to continue for the better part of the next three decades. Meanwhile, the national debt currently stands at more than $14 trillion.

The reality is that the only thing that either of these plans will do is slow down the rate at which debt is added.

The deficit is expected to top $1.5 trillion this year. It will be added to the already massive national debt. And that debt will just keep growing for decades to come, meaning that the interest payments on the debt will also continue to grow — even if interest rates somehow managed to stay as low as they are at present.

However, rates are sure to rise as foreign creditors become increasingly uneasy about the magnitude of the ever-increasing US debt. That debt has been growing for decades, regardless of which party has controlled the White House or Congress.

The US is now in a hole from which it cannot be extricated.

Even if Congress never approves another spending increase or tax cut, the government will not have sufficient revenue to cover all the bills that will be coming due.

Huge corporations, like GE and Bank of America, pay nothing in taxes and in fact receive payments from the Treasury. Millions of Americans remain unemployed and are not contributing to the tax base. Millions more have taken pay cuts and are contributing less than in the past.

Let there be no mistake; our government has a problem with both spending and revenue. Even worse, these may be predicaments for which there is no solution and no return.

The Afghan war, alone, costs more than $9 billion a month. This means that the government is spending more than $100 billion a year on an unwinnable war. Money is being poured into the rebuilding Iraq and Afghanistan even as America crumbles.

The US has no hope of ever paying off its debts and liabilities through any combination of spending cuts or tax hikes. Its only hope is a very dangerous one; to inflate away its debts.

However, inflating a currency devalues that currency. This will be a horrible reality for all Americans to grapple with. And it will eventually cause interest rates to soar, or drive foreign investors away from the Treasury market entirely.

Rising interest rates will slow growth and thwart capital investments. Simply put, it will become prohibitively expensive for both businesses and individuals to borrow money. That will cause further damage to an already fragile economy.

As these realities become more clear to the average American, it will make the 2012 election cycle particularly bitter and acrimonious. There will be much finger-pointing and lots of blame to go around. The political debate will be even more nasty than usual.

The US has entered a crisis stage and things are about to get very ugly and uncomfortable.

As Carmen Reinhart and Kenneth Rogoff have illustrated, once federal debt held by the public reaches 90 percent of gross domestic product, a critical insolvency threshold has been breached. And, as their work shows, debt ratios that high will cause GDP growth rates to fall.

Slowing growth — or worse, a shrinking economy — only causes debt ratios to increase.

Unfortunately, the US is now approaching that point of no return, with a publicly held debt equaling 70 percent of GDP.

The debt held by the public is all the federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside the United States Government.

As we've seen, there is no political plan that will stop the inevitable growth of the US debt. Even the most draconian of plans will only slow annual budget deficits and the subsequent debt growth.

In the mean time, there will be much pain spread amongst the public. This will particularly affect the weakest and most vulnerable in our society, including the elderly, the poor, the disabled, the unemployed, the uneducated and the unskilled.

It will also affect everyone with savings, a pension or a 401k plan.

The vast majority of Americans have no experience with, and no paradigm for, the kind of difficulties we are headed for as a nation, or with the troubles that millions of them, their families, their friends and the neighbors will all be facing.

There are no political solutions ahead; only painful outcomes.

Sunday, April 10, 2011

The Crunch Is On

According to Census Bureau data, real median income has not grown for almost 14 years. In fact, median household income fell from over $52,000 in 1999 to $49,777 in 2010. It's considered the lost decade.

While incomes have been stagnant or falling, Americans' most valuable assets — their homes — have been plummeting.

Given the rise in food and fuel costs, which are now about 23% of the average person’s income, you get an idea how much the average American is struggling. Medical and tuition costs are also outstripping the general rate of inflation.

Most Americans are falling further behind, not getting ahead. The American dream is dead and over for huge swaths of our fellow countrymen.

According to a study commissioned by Wider Opportunities for Women, a nonprofit group, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour.

The recession / economic downturn have pushed millions of Americans into poverty and are leaving millions more hanging by a thread, with the potential for slipping over the precipice.

Despite recent unemployment data, which at first blush seems optimistic, according to the Bureau of Labor Statistics, 13.5 million people remain unemployed in the US. But that number doesn't accurately reflect the true number of unemployed Americans.

The unemployment rate is improving only because it doesn't count a lot of people — including those who have stopped looking for jobs and dropped out of the labor force. The employment-to-population ratio, which measures the share of the U.S. population that has a job, has hardly budged over the past year. And that means the percentage of people working in this country hasn't changed even though the unemployment rate has ticked down.

This is particularly bad news since our population is continually growing, having increased by 30 million people over the last decade. Meanwhile, job growth in that period was negative.

However, the economy needs to add about 150,000 jobs a month just to absorb the annual population increase and the entrance of new people into the workforce, such as college grads.

The government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. Obviously, that isn't happening.

Yet, that sort of growth would only benefit new workers, not the already unemployed.

While 240,000 new jobs were created in the private sector (216,000 non-farm jobs) last month, that will be a tough pace to sustain. Yet, this kind of job growth must be maintained for the nation to dig itself out of the hole it's in.

Beginning last year, the US needed to add 2.15 million private-sector jobs per year and maintain that pace for more than 7 consecutive years (7.63 years), or until August 2017, just to eliminate the jobs deficit.

If you're doing the math, you know that's 179,000 new jobs each and every month. That's not likely to happen either.

Over the last decade, our GDP was driven by government spending. Obviously, that has to end. However, cutting government spending will mean lower GDP numbers in the short term, though it will allow our survival in the longer term.

The private sector is incapable of stepping in, as the government steps out, to maintain the already fragile economy. We will just muddle along, unable to grow our way out of this problem. Cutting government spending will be both a blessing and a curse.

There is a growing conversation about cutting entitlements, yet very little about defense and security spending, which account for the biggest chunks of federal spending. Huge defense corporations are hell-bent on maintaining wars and the federal-funds pipeline that feeds them.

Right now, the US is in the unprecedented position of fighting three concurrent wars. The Afghan war, alone, costs more than $9 billion a month.

Eisenhower warned us to be wary of the military-industrial complex. He was right. We're a nation constantly at war, spending trillions on defense, while we give millionaires, billionaires and corporations massive tax breaks.

While the nation fights these unwise, unfunded, unwinnable wars, there is passionate discussion of the need to cut Social Security benefits to save the republic.

Perhaps those arguing for such cuts should be reminded that there is a $2.5 trillion dollar Social Security surplus that is owed to the American people. And Social Security cannot legally add to the deficit; It is one of the few expenditures (like unemployment insurance) expressly paid for through worker's paychecks each and every week.

While Republicans and Democrats were patting themselves on the back for agreeing to $38.5 billion in budget cuts, the national debt jumped $54.1 billion in just the preceding eight days.

As politicians bicker and engage in absurd partisan battles, the Titanic is sinking. Many will be lost with it.

Even before all the massive and requisite budget cuts are initiated, millions of Americans are already sliding backwards. And there is no backstop to support them.

Saturday, April 02, 2011

Financial Sector Compensation at Obscene Levels

The issue of outsized CEO pay has gotten plenty of attention in recent years, and for good reason.

According to data compiled by the Institute for Policy Studies, the average American CEO earned 319 times the salary of the average U.S. worker in 2008.

It was an enormous increase from historical trends; in 1980, the ratio between CEO and worker pay was 42 times.

So, in the intervening three decades, things got really out of whack.

A report by the Economic Policy Institute looked at top CEO pay in 2007 and found that, "In 2007 a CEO earned more in one workday (there are 260 in a year) than the typical worker earned all year."

This isn't simply a matter of fairness, it's a matter of lost jobs — lots of them.

A reduction in the CEO pay multiple to the 1980 level would allow the average U.S. company to hire an additional 277 workers. This reduction, applied across the Wilshire 5000 index, would create nearly 1.4 million jobs, according to

In no other place is the scale of executive compensation more outrageous than on Wall St. and in the financial sector as a whole.

Bartlett Naylor of Public Citizen has just issued an eye-opening report titled, "A Modest Essay About Extraordinary Paychecks", which examines executive compensation on Wall St.

How out of line is executive pay on Wall St.? Well, consider the following:

In 2009, hedge fund manager David Tepper made President Obama’s annual salary every fourteen minutes.

President Obama earned $400,000 in 2009, or $200 an hour.

Tepper, the best paid hedge fund manager in 2009, made $4 billion. Assuming an eight-hour working day, and 2000 hours per year, that amounts to $2 million an hour.

To provide some perspective, per capita income in the U.S. was $46,436 in 2009. This works out to $23 an hour.

Millions and billions are both very large sums, but the difference between a million and a billion is profound: A million seconds is about 12 days, while a billion seconds is 30 years.

Tepper donated $55 million to Carnegie Mellon University, which, at first blush, seems exceedingly generous, until you discover that it was half a week’s paycheck for him.

According to Forbes, Oprah Winfrey was the best paid entertainment figure at $225 million, or $112,500 every hour.

But there is only one Oprah. There are lots of Wall St. bankers and other assorted financial overlords.

Thomas Montag, president of global banking at Bank of America, received $29 million, or $14,500 an hour. Yet, that was a mere pittance compared to Tepper.

Clearly, Wall St. is the place to be if money is your highest aspiration.

James Simons of Renaissance Capital led the list of best paid hedge fund managers in 2006 and 2008 with more than $1 billion in annual compensation. Yet, even after the financial crash, Simons is estimated to have earned $2.5 billion in 2009.

So the problem of excessive compensation is actually getting worse, despite the bad economy.

Notwithstanding his $2.5 billion in earnings, Simons was only third on the list of highest paid hedge fund managers in 2009.

Yes, there are even bigger fish in the Wall St. shark tank.

In 2010, hedge fund manager John Paulson exceeded David Tepper’s 2009 earnings of $4 billion by securing an estimated $5 billion in fees and profit share from his firm. That’s $2.5 million each hour. Or $42,000 a minute.

If you total the national economic output of the bottom 14 nations of the globe, you would still come a half billion dollars short of the $5 billion Paulson received in 2010.

That's right; one man out-earned the entire GDPs of 14 entire countries.

In 2010, Paulson also made about the same money as the revenues of Gannett, the company that employs 32,500 workers and produces 83 daily newspapers, including USAToday.

Mr. Naylor goes on to detail just how out of line hedge fund compensation is compared to executives in other industrialized nations, such as Japan, Germany and the UK.

As Naylor notes, hedge fund managers "place bets against other gamblers, and for every dollar they win, someone else loses."

That's because hedge fund managers are allowed to sell short, meaning they can profit when a security falls in value.

The simple truth is that hedge fund managers don't create anything tangible and they don't add to the economy. They simply move existing money around the Monopoly board, while skimming off the top for themselves.

How much is enough for Wall St. types? Clearly, the sky is the limit. Too much is never enough because neither exists in their world.

Vanguard founder John Bogle's book "Enough" attempts to measure what really counts in life.

The title, as Bogle explains, comes from a conversation between Kurt Vonnegut and novelist Joseph Heller, who are enjoying a party hosted by a billionaire hedge fund manager.

Vonnegut points out that their wealthy host had made more money in one day than Heller ever made from his novel Catch-22.

Heller responds: "Yes, but I have something he will never have: enough."