The Great American Hole Gets Deeper by the Day 37 comments
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More cold hard facts as to just how deep in debt we really are.
I promise to stop soon. I really do.
It brings me very little pleasure to upset you this way on such a constant basis. In fact, I look forward to the day when this column is full of nothing but 'hot' stock tips.
But I’d rather bring a steady diet of hard cold facts, than any sort of hollow sugary confection. In the end, it’s healthier for all of us to face up to the problems at hand now, before they grow even larger.
And so with that in mind, I have an update on the bank situation and a heads up on another brewing crisis along the same lines. On Monday, I showed you the growing gap between the Federal Deposit Insurance Corporation’s growing responsibilities and the funds it has set aside to cope with same.
Washington Concedes the Growing Gap
Well, I’ve got good news and bad news on this front. FDIC Chairman Sheila Bair has officially conceded both the size of this gap and its truly awful potentialities.
In a letter to all insured banks, she warns that “rapidly deteriorating economic conditions” will cause the wave of bank failures to continue well into 2010. She also warns that the Deposit Insurance Fund (DIY) – our only bulwark against the complete destruction of any personal banked funds – is at risk of insolvency before the end of 2009.
I suppose it is bracing to hear a Washington bureaucrat be so forthright as to the sword of Damocles that hangs over her charges. Unfortunately the cure she is recommending may be worse than the disease.
The Fatal Cure
Bair proposes to hit every bank in her portfolio with a round of “substantial assessments.” In point of fact, this program has already begun under cover of darkness. Last week, the FDIC imposed a series of “program fees,” including a “one-time emergency fee,” in an effort to staunch the DIY’s bleed-out.
The problem is, these increased assessments may preserve the soundness of large banks, but they sound the death knell for otherwise solvent smaller banks who are hanging on by their fingernails. These guys have done their best to play by the rules, but they just don’t have the clout in Washington that the big houses can bring to bear.
Independent Community Bankers of America President Camden Fine says that these fees could wipe out 50% to 100% of his clientele’s 2009 earnings. In an interview with Bloomberg’s Alison Vekshin, he reported receiving thousands of e-mails and phone messages from angry bankers worried that Washington was sacrificing them on the altar of expediency.
Despite all this blowback, Chairman Bair refuses to tap the FDIC’s $30 billion line of credit at the Treasury Department, insisting instead that banks and not taxpayers should foot this bill. As I said: It is refreshing to hear a Washington cog insist that the industry she watchdogs pay its own way. However, she may very well be destroying that industry as we know it.
Another Massive Hole
Now let us turn our attention away from Washington and toward Chicago, where, I am told, the local transit authority has a small problem with its pension fund. Actually, it’s a $1.5 billion problem. That’s how big their shortfall was… in 2007, when the market was sailing. As things stood, this 62% funding gap left the CTA unable to pay retirees as soon as 2013.
Not to worry, CTA officials thought. We’ll just do what everyone else is doing, and borrow to fill the hole. This is an “awkward” solution in the best of times. If nothing else, the recent crash has been an object lesson as to where excess leverage can leave a person, fund, state or even country.
Unfortunately, this harsh reality intruded most rudely into Chicagoland’s little fantasy world. Since the beginning of 2008, the CTA has been paying out more to bondholders than they are earning on the borrowed funds, further exacerbating the Authority’s funding gap. In the end, the bill for this debacle will most likely end up on the taxpayer’s tab as well.
Now normally I wouldn’t bother you about such a paltry local issue. After all, what’s a billion or two between friends? But this particular crisis is not merely local. Indeed, when I dug into things a bit, I discovered that numerous state pension funds around the country are coming up short in a similar fashion.
You Expected to Make What? Are You Joking? You’re Not Joking? Oh My God!
The idea is that bond funds are to be borrowed at, say 2%, and then invested so as to earn, say, 8% to 10%. The income produced is used to both service the debt and fund operating costs, capital projects and pensions.
I’m serious here: The Teacher Retirement System of Texas – the seventh largest pension fund in the country – expects to make 8% off its endowment. In reality, it has been making 2.6% for over a decade. The largest public pension fund in the country, the California Public Employees Retirement System, has built in 7.75%-8% into its projections…and has not done better than 3.32% in recent memory. Except for 2008, when it lost 27%.
Brace yourself now: total up the estimated shortfalls for funds across the country, and you have yet another trillion dollar hole that Washington will be forced to fill. And by “Washington,” I of course mean you, me, and most all our anticipated descendants.
To paraphrase that cute little Chihuahua from the old Taco Bell ad: “I think we are going to need a bigger shovel.”
Disclosure: None
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> "And by “Washington,” I of course mean you, me, and most all our
> anticipated descendants."
>
> can't we all just walk away like Jim Rogers? What is it to be American,
> if someone can just leave without having to pay for the sins of the
> past that created an environment where they prospered?
I'm sure the comment above will anger many but it is at the heart of the solution; we need to face the consequences of what WE did. Yes, there are many people in power who abused the system but we allowed them to because we were sharing in the wealth.
The answer is to work harder and to live a more frugal life and to not prosper at the expense of others but to build real wealth, which enriches all of us. The sooner we start on this path, and it's a path each of us can start down on our own, the sooner we get back to being a great country once again.
There is much that each of us can do to make sure we survive and prosper in the coming years. This is America and we are not at the mercy of the government. If you wish to wait around for them to rescue you, well, just remember how that worked out during huricane Katrina.
>> "Everyone knows this is a problem; what they also know is that the Fed will simply inflate our way out of it." >>
The sad truth is that too many people think "inflating our way out of it" is possible. That's what they thought in Zimbabwe too. Anf the Weimar s.
I fear that after stealing way too many of the golden eggs, the shakers and movers are about to have a goose dinner. And we, the people, are not invited to dinner.
> Everyone knows this is a problem; what they also know is that the
> Fed will simply inflate our way out of it. No one can actually afford
> the multi-trillion dollar bill associated with the pension funds,
> much less the even larger bill associated with Social Security and
> especially Medicare. Tax rates would have to be 80% or more all the
> way down to the ordinary workers and even the poor might have to
> chip in by paying 0% instead of the enormous negative rates they
> pay today. In short, no one will stand for it. That, ironically,
> is why no one is really worried about these problems. We already
> know how they're going to be "solved". The key is to own plenty of
> gold and be short government debt and the US dollar. That way, no
> matter what kind of machinations the Treasury and the Fed come up
> with to fill this hole, you are going to profit. You may, however,
> want to consider taking those profits from a safe distance. No reason
> to hang out on a sinking ship.
Being long "real" assets such as gold is wise, IMO, but one thing I have seen as a certainty all along since the start of this mess is that stocks will go down. That has been proven out over a year and a half and will be proven true for at least another year.
It is hard to say if we will see inflation at some point because the economy is deflating so fast and it is hard to say if the dollar will stay strong because of all the problems in the US and it is hard to say if the FDIC will survive or if Eastern Europe will implode or... The common denominator is that all of these uncertainties point to lower stock prices...ALL OF THEM AND EVERY ISSUE WE HAVE DEALT WITH OVER THE PAST YEAR AND A HALF.
SDS is my main trading vehicle these days.
On Mar 06 11:37 AM axelrod608 wrote:
> bearfund sez -
Thus, why not simply raise the taxes until public pension funds are fully funded?
And to follow through on the hyperinflation economy, let’s put on the ballot an inflation adjustment clause for our public pensioned employees so that they will be protected from the coming hyperinflationary economic environment.
I have heard that Federal employees already have that clause built into their pension plan.
On Mar 06 08:39 AM Leftfield wrote:
> Now it turns out that silver-tongued Obama can't speak without a
> teleprompter.
On Mar 06 06:41 AM plumstupid wrote:
> I thought American's rolled up their sleves, pulled themselves
> up by their bootstraps and cowboyed up! Oh, that's just a silly fairytale
> too?
"Washington, D.C. (March 5, 2009)—The Independent Community Bankers of America (ICBA) appreciates the Federal Deposit Insurance Corporation’s pledge to cut its 20-basis-point special emergency assessment if Congress approves legislation expanding the FDIC’s existing line of credit with Treasury...."
...and where does the fault lie regarding the pension funds shortfall?...perhaps they simply listened the Wall Streeters' and hedgies' pitches about the extraordinary returns they could achieve using derivatives and leverage...or perhaps they subscribed to your newsletter where you explain
"Here's how you could turn Wall Street's PAIN into a 166% GAIN by March 15th... Read on now for detailed trading recommendations..."
...and while this normally costs $1990 for a two year subscription, because times are hard you'll be generous and cut the price to a mere $495!...well, ain't you special?!...the nice thing about the crash is the prospect of someday seeing a joker like you standing on a street corner holding a sign saying "Will work for food."
I read an article the other day from an analyist that said Japan has a per capita debt around US$150,000.00
that is a lot more than the US per capita debt.
It does not look good for Japan going forward, never mind the eastern block.
Currencies around the world may have to be devalued or discontinued all together.
Lets hope that somhow we can get through this & once again start manufacturing goods in North America to sell to North America.
because the way it stands right now (North America) is the consumer without jobs & China is the manufacturer.
Lets all hope someone can manufacture a made in North America
solution to this problem.
Japan per capita debt is around US$157,000
chinese national debt around 500 billion
American per capita debt +-27,500
Canadian per capita debt 13,500
Japan is doomed to failure
Americans really are not that bad off yet however pay attention it is climbing fast. Oh and Canadas debt is actually shrinking, they have been paying down their debt.
A good bet going forward would be to go long on the Canadian Lonnie.
On Mar 06 09:42 AM plumstupid wrote:
> What? Are you saying Jim Rogers caused the economic collapse? <br/>
>
> As for leaving and not having to pay: Why would someone have to pay?
> And, why be angry at Rogers for that. How about Aronson? You remember
> Aronson don't you?
>
"I fear that after stealing way too many of the golden eggs, the shakers and movers are about to have a goose dinner. And we, the people, are not invited to dinner."
It may well be their last dinner before having a rope around their necks.
"My father worked for 30 years for the California Dept. of Motor Vehicles and retired at age 55. He lived to age 96, all the while receiving a pension from CALPERS."
Your Papa was one lucky parasite. Sorry, these happy times are over for at least the next 50 years.
silverfox wrote:
- Japan per capita debt is around US$157,000
- Chinese national debt around 500 billion
- American per capita debt +-27,500
- Canadian per capita debt 13,500
- Japan is doomed to failure
----------------------...
What a loony statistics.
Chinese internal debt is irrelevant. Remember they have a Communist government. But Chinese foreign currency reserve is over $2T and growing daily. So, do not worry about China.
As for Japan, they are Asians and can handle internal problems. Japan has huge foreign reserves.
The real catastrophic problem for the USA could be very close & friendly China & Japan cooperation in economic and military matters.