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Seattle Bubble Forum Archive • View topic - Convince me the economy is going to rebound

Convince me the economy is going to rebound

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Convince me the economy is going to rebound

Postby siddha99 » Fri Aug 29, 2008 6:42 am

Our current US debt is at $10 trillion. The Fannie May/Freddie Mac bailout will add another $5 trillion to that. But this only scratches the surface for what's to come.

From financialsense.com, 8/26/2008

US Greenback - The Path to Monetization
BY FRANK BARBERA, CMT

Unfortunately, we live in turbulent times. 'Clarity' can sometimes be a difficult commodity to come by and real confidence, even more rare. At this juncture, it seems clear that the US Government has set itself upon a course of unlimited damage control. Institutions will continue to fail in the coming year, and Uncle Sam appears ready to step up with his giant tube of crazy glue, intent on making sure that nothing falls apart. It is likely a self-defeating course of action, as bail-out after bail-out will require a steady stream of new digital money. Monetary inflation is the likely end game result.

In the process, confidence is likely to steadily erode and with it, the purchasing power of the Dollar. While many are currently proclaiming a new Dollar bull, we see nothing in the current fundamental monetary climate that would justify such an outcome. While all markets are given to periodic recovery swings and regular counter-trend movements, in order for a secular trend to alter course, there needs to be a solid fundamental under-pinning, which in the case of the Dollar is entirely absent. For the Dollar, large Current account deficits remain, and now, the Federal Deficit is once again running out of control, poised to hit records in the years ahead. It is likely, ultimately, this concern about the ability of the US government to fund its many obligations which will start trouble in the Current Account and a more aggressive period of foreign Dollar diversification. For those who missed it, Fed Governor Richard Fisher of the Dallas Fed, presented a lot of the grim statistics in a speech he made back in late May. Hearing this from those in the so-called 'lunatic fringe' is one thing, but hearing it from a Fed governor is quite another. 'Clarity,' potentially straight from the horses-mouth. I might add that this speech was given before Fannie Mae and Freddie Mac ran into real trouble, an outcome that now threatens to place an additional 5 Trillion dollars of mortgages and mortgage guarantees onto the back of US tax payers. Here are a few of Fisher's highlights which are not for the faint of heart:

"The good news is this Social Security shortfall might be manageable. While the issues regarding Social Security reform are complex, it is at least possible to imagine how Congress might find, within a $14 trillion economy, ways to wrestle with a $13 trillion unfunded liability. The bad news is that Social Security is the lesser of our entitlement worries. It is but the tip of the unfunded liability iceberg. The much bigger concern is Medicare, a program established in 1965. Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy. Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent. I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the "funded" entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well.

Let's say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household's income. Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68 percent increase in federal income tax revenue—from individual and corporate taxpayers—would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.

Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation's entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated, really—to tackle this problem through discretionary spending. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?
If these possible solutions to the unfunded-liability problems, throughout history, many nations, when confronted by sizable debts they were unable or unwilling to repay, have seized upon an apparently painless solution to this dilemma: monetization. Just have the monetary authority run cash off the printing presses until the debt is repaid, the story goes, then promise to be responsible from that point on and hope your sins will be forgiven by God and Milton Friedman and everyone else. We know from centuries of evidence in countless economies, from ancient Rome to today's Zimbabwe, that running the printing press to pay off today's bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid. If these measures seem draconian, it's because they are draconian."

Clearly, Mr. Fisher has blunt views and has plainly laid out some of the serious problems at hand. Perhaps there is a growing psychological awareness among those in high offices, including (very strangely) Mr. Greenspan, of the scope of the monetary collapse potentially dead ahead. I say this because it is interesting to note how many officials have gone on record with blunt quotes about the true state of affairs in just the last few months. The elusive 'clarity' which for years was routinely buried and hidden from public view, has surfaced many times in recent months. Perhaps these public officials are looking ahead and assessing what will be the very angry mood of the global population when a massive crisis has occurred and blame is in need of being assigned. At that time, candid quotes like these will seem like prescient warnings--a la "I told you so"--and perhaps ameliorate, or re-direct, the pointing finger of culpability. It is doubtful in many cases that this will succeed. Nevertheless, the odds are that paper money across the board will fall relative to commodities in coming years, that few national currencies will stand up well in the coming storm. Thus, for investors, the first place to start is to obtain a grasp of commodities, not simply as things, but as items for which increased output cannot be easily engineered. Scarcity will be the chief calling card for money, along with portability, and divisibility leaving the Precious Metals with no equal.
siddha99
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Posts: 33
Joined: Mon Apr 28, 2008 1:49 am

Re: Convince me the economy is going to rebound

Postby lamont » Fri Aug 29, 2008 8:37 am

lamont
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Re: Convince me the economy is going to rebound

Postby siddha99 » Fri Aug 29, 2008 10:41 pm

siddha99
Bubble Watcher
 
Posts: 33
Joined: Mon Apr 28, 2008 1:49 am

Re: Convince me the economy is going to rebound

Postby lamont » Sun Aug 31, 2008 9:29 am

lamont
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Re: Convince me the economy is going to rebound

Postby siddha99 » Tue Sep 09, 2008 3:18 am

siddha99
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Posts: 33
Joined: Mon Apr 28, 2008 1:49 am

Re: Convince me the economy is going to rebound

Postby lamont » Tue Sep 09, 2008 11:20 am

lamont
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Posts: 213
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Re: Convince me the economy is going to rebound

Postby siddha99 » Tue Sep 09, 2008 12:25 pm

siddha99
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Posts: 33
Joined: Mon Apr 28, 2008 1:49 am


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