Wednesday :: Mar 23, 2005

Deadbeats On Pennsylvania Avenue

by pessimist

Equifax, Experian, and Trans Union are the nation's credit reporting agencies. Every one of us who has ever had any kind of a financial transaction has some kind of a file with each of these agencies. Thanks to the Fair Credit Reporting Act, each of us can request once each year a free copy of our records that each of these agencies has. This way, we can see exactly what our creditors know about us, and can - with some difficulty - adjust these records.

Dun & Bradstreet offers a similar service for business credit ratings.

There are many sites that offer advice [PDF] and information [PDF] about what the data in one's credit file mean.

Maybe we Americans should have similar information about the world's largest debtor - the Federal Government of the United States of America?

Certainly the creditors of the Federal Government know what kind of economic shape our government is in!

U.S. Relying More on Foreign Investors

Japan, China, and Britain are the biggest holders of Treasury securities.

* Japan's holdings in January stood at $701.6 billion, down from $711.8 billion in December, according to the Treasury Department.

* China's holdings came to $194.5 billion in January, compared with $193.8 billion in the previous month.

* Britain's holdings stood at $163 billion in January, down from $163.7 billion.

That's 1 trillion, 59 billion, 100 million dollars. Of Debt. That Bu$hCo spent.

And that YOU will have to repay.

Aren't you glad that your government is seeking to change the bankruptcy laws so that they only apply to you, and on your behalf?

One has to wonder what these three nations, prime among those who have lent the US government money through the purchase of Treasury Bonds, would do if they US were to default on our loans. While Equifax, Experian, and Trans Union, nor Dun & Bradstreet, aren't in the business of national credit rating, maybe there should be something of the sort, especially in light of this news:

City says it can't afford security for presidential, VP visits

EVANSVILLE, Ind. - After being "used like a pair of work gloves" by the Secret Service, Evansville no longer can afford to provide security for presidential and vice presidential visits, the city attorney said. Evansville City Attorney David Jones also criticized the Secret Service for refusing to provide evidence, testimony and witnesses to help defend the city against a lawsuit brought by environmental activist following a 2002 arrest outside a fund-raiser featuring Vice President Dick Cheney.

A federal judge ruled Thursday the city must pay undetermined damages to the activist for violating his free speech rights.

"This is not fair," Jones told the Evansville Courier & Press for a story published Saturday. "We've been used like a pair of work gloves, and when we were no longer handy, we were just discarded."
Jones said the Secret Service planned security for the private event at which city police arrested activist John Blair for violating a no-protest zone.

U.S. District Judge Larry McKinney ruled Thursday that police violated Blair's First and Fourth Amendment rights. The size of the no-protest zone "burdened speech substantially more than was necessary to further the defendants' goal of safety," McKinney wrote. McKinney noted the police had been unable to present any evidence that a "particularized threat" to Cheney existed to justify the size of the no-protest zone.

A Secret Service agent who no longer works for the agency told police that protesters had to be kept at least 500 feet away from the entrance to The Centre, a convention hall where Cheney was appearing at a Republican fund-raiser for Rep. John Hostettler, R-Ind.

Evansville Police Chief Brad Hill said the Secret Service's security plan for Cheney's visit required the Police Department to use both on-duty and off-duty officers. Hill said no tally was made of the cost involved, but called it the "largest security effort" undertaken in his 23 years on the force.

Jonathan Cherry, a spokesman for the Secret Service in Washington, told The Associated Press that the agency does not have the funding to reimburse host communities for security-related costs they incur.
"The Secret Service has always relied heavily upon the assistance we receive from our law enforcement partners during protective visits. The necessary level of security for our protectees could not be provided without that support," Cherry said by telephone from Washington, D.C.


But should you want to see the original articles I drew upon, ...

Bush host leaves bill for security costs

After well-attended fund-raisers at Patrick G. Ryan's Winnetka [IL] home, one headlined by President Bush in July and another attended by first lady Laura Bush in September, the haul for the Republican Party stood at roughly $3 million.
"Notwithstanding the hundreds of millions of dollars they raise, there seems to be no concern about the costs they impose on local communities," Village President Michael Duhl said.
For area taxpayers, who ultimately paid for a legion of police to guard the high-profile guests, the cost stands at more than $75,000.

According to documents released by the village, Winnetka shouldered at least $6,855 for use of its non-police personnel during the president's visit. The remaining $68,478 in police wages were paid out by 50 area departments, including Winnetka, Glencoe, Wilmette, Northfield and Kenilworth. Security was scaled down for the first lady's visit.

Winnetka officials, attempting to sidestep the role of campaign financier, are trying to recover the money from Ryan, who was Bush's campaign finance chairman. So far their satchel remains empty.

We Have All Been Here Before
Secret Service spokeswoman Lorie Lewis said the group wouldn't pay the bill. "People have called to ask us, 'Hey, can you pay back local cops' and again our answer is we're not equipped or funded to reimburse communities," Lewis said.

Des Moines, IA also got stuck for $200,000 around this same time. Those conservative watchdogs of the people's tax monies had this to say:

Pete Sepp, a spokesman for the National Taxpayers Union, a nonpartisan group that lobbies for less government spending, said trying to recover those costs is often a losing battle.
"I wouldn't be waiting by the mailbox for a reimbursement check if I were the mayor or a city council member," Sepp said.

[You can also find this article here.]

The first article was datelined Novenber of 2004. This latest from Evansville is dated this last Monday [3/21/05].

These two articles present a pattern of not paying financial obligations, one that if you or I performed, we would find that our credit ratings would become so low that we probably couldn't borrow loose change for a phone call, much less trillions of dollars to conduct a war for oil to supply gas-guzzling SUVs while keeping the consumer society fluid enough to buy both (although how anyone on Wal-Mart wages does so is beyond me!).

Maybe our national creditors ARE looking at such things, for it has been just the last few months that they have been speaking publicly about holding fewer dollars in their reserve accounts. The run on the Federal Reserve may only be beginning:

World: Signs Grow Of Dollar Losing Favor As World’s Reserve Currency

It began with Russia. Over the past few years, the Russian Central Bank has reduced the share of dollars in its foreign currency reserves.

Then Indonesia said it, too, was considering such a move.

On 24 February, Bahrain's central-bank governor said the euro is increasingly emerging as an international reserve currency.

And reports the next day -- later played down -- suggested South Korea planned to sell some of its dollar reserves.

Ashraf Laidi, a currency analyst in New York, said it's clear why "diversification," a trend by countries to hold more of their reserves in currencies other than the dollar, is a hot topic just now.

"This talk is really part of central banks' growing unease with holding on to a currency that has lost approximately 30 percent of its value over the last three years. It makes sense [for them] to hold on to something that does not lose its value," Laidi said.

A survey last month by Central Banking Publications showed many central banks have increased the share of their reserves held in euros.

So Many Countries, So Little Faith In The Dollar

Dollar Crisis Evokes Panic Among World Financial Elite

A series of international conferences, starting with the Davos World Economic Forum, and extending into the United States, has led to the open airing of panic within the international financial elite. Top on the agenda is concern over the U.S. dollar, which declined about 30% between early 2002 and early 2004, but, equally importantly, the debt-drowned condition of the U.S. economy, which an increasing number of bankers believe cannot be sustained.

The dollar's problems took center stage at the Davos conference, which was held over the first weekend in February in Switzerland. Raising the alarm were former U.S. Treasury official and head of the Institute for International Economics, C. Fred Bergsten, and Morgan Stanley's chief economist Stephen Roach, both of whom warned of an imminent popping of one of the huge credit bubbles holding up the U.S. economy, not to mention the increasing U.S. budget deficit.

Most alarmist was Bergsten, who addressed the danger facing the United States in the form of its huge trade and current account deficit.

"The U.S. must now import $5 billion in foreign capital a day merely to finance the current accounts deficit," Bergsten said.
In the face of this, according to the London Financial Times, he forecast a sharp sell-off of the dollar coming "within weeks," and a full-blown dollar crisis: a combination of dollar selling by the foreign-exchange markets, coupled with a forced abandonment of the policy, up to now, of central banks' increasing their dollar holdings.

That was just a month ago in February. This was the word as of early March:

Is America going broke?
Record deficits, colossal debt and no clear plan for digging itself out. If the U.S. sinks, it will take Canada down with it.

David Walker can see the future, and it scares the hell out of him. But Walker isn't a lobbyist or an activist, he's an accountant. His title is Comptroller General of the United States, which makes him the head auditor for the most important and powerful government in the world.

He's desperately trying to get a message out to anyone who'll listen: the United States of America's public finances are a shambles. They're getting rapidly worse. And if something major isn't done soon to solve the country's intractable budget problems, the world will face an economic shakeup unlike anything ever seen before.

THE NUMBERS are staggering -- a US$43-trillion hole in America's public finances that's getting worse every day. And the stakes are almost inconceivable for a generation of politicians and voters raised in relative prosperity, who've never known severe economic hardship.

But that plush North American lifestyle to which we've all grown accustomed has been bought on credit, and the bill is rapidly nearing its due date.
If the United States can't find a way to pay up, the results will spill beyond national borders, spreading economic misery far and wide. In Canada, the country whose financial well-being is most tightly tied to trade with the U.S., there wouldn't be a single region or industry left untouched by a fiscal shock south of the border. "The sooner we start fixing this, the better," he says, "because right now the miracle of compounding is working against us. Debt on debt is not good. We have to first stop digging, and then figure out how we're going to fill the hole."
In January 2001, George W. Bush took over leadership of a nation that was on its most solid financial footing in decades, thanks to years of strong economic growth and a booming stock market. That very month, the Congressional Budget Office projected that the federal government could expect US$5.6 trillion in surpluses over the coming 10 years. The key political issue of the day was how to spend the windfall. Bush's team was determined to return the money to the voters in the form of massive and widespread tax relief.
What the world didn't know was that this surplus cash was largely illusory, the result of faulty bookkeeping.
The CBO's rosy outlook was based on a few deeply flawed assumptions, in particular that most government spending would not exceed the pace of inflation over the following decade, even though the rest of the economy and tax revenues were projected to grow much faster.

Laurence Kotlikoff, a professor of economics at Boston University and a prominent critic of U.S. budgetary planning, released a paper that year drawing attention to what he called the CBO's "fiscal fantasy." But his was a single, lonely voice, and few on Capitol Hill were listening.

The tax-cut agenda had taken hold, and there would be no stopping it.
The CBO and other agencies have since gone back and found that a more realistic surplus projection would have been US$2.2 trillion -- over 60 per cent less than initially thought.

That cushion quickly disappeared as Bush whittled or eliminated one tax provision after another, from the marriage tax and personal income tax rates to capital gains, gifts and dividends. The Center for Budget and Policy Priorities, a Washington think tank, estimates that between 2001 and 2004, federal tax revenue dropped by some US$600 billion. Most of the tax cuts introduced so far are temporary, but the Republicans have made it clear they intend to make the reductions permanent before the end of the current term.

A trillion is a hard number to wrap your head around. Most people know it's a thousand billion -- 12 zeroes -- but even that is difficult to fathom in terms of value. So think of it like this:
A trillion U.S. dollars is roughly the size of the entire Canadian economy.
* The world's six biggest oil companies had combined 2004 revenues just shy of US$1 trillion.

* If you piled a trillion dollars in $1,000 bills, the stack would be more than 109 km high [Just over 68 miles - ed].

As of February, the U.S. national debt stood at US$7.7 trillion.
This year, the country is projecting another record deficit of US$427 billion, increasing its debt by about US$1.2 billion a day.

Thanks to low interest rates, the cost of borrowing all that money remains relatively low, amounting to about 8.6 per cent of the federal budget for 2005. But when rates rise, so will the cost of carrying that debt, and current White House forecasts suggest that by 2010, those yearly costs will hit US$314 billion.

But even those projections don't adequately capture the depth of America's financial hole. For one thing, current budget estimates do not include the costs of the ongoing military campaigns in Iraq and Afghanistan, which are expected to require an additional US$80 billion in funding over the next year or so.

The budget also does not factor in any costs associated with the President's plan to reform Social Security, which would give people the option of diverting some of their tax contributions into private retirement accounts they manage themselves. That plan will call for between US$1 trillion and US$2 trillion in additional government borrowing over the next decade.

Bush has proposed cutting the budget deficit in half by 2010, but that strategy doesn't take into account his pledges to make permanent many of those temporary tax reductions introduced in 2001 and 2002, not to mention other tax cuts promised but not yet implemented.

What's more, none of this even begins to deal with the most pressing challenge of all: how to pay for the sunset years and medical costs of about 77 million baby boomers getting set to retire.
Walker refers to this as a 'demographic tidal wave' coming to swamp the country's finances.

He estimates that when you take into account the unfunded liabilities of Social Security, Medicare and Medicaid -- programs that together comprise the heart of the U.S. social safety net, paying pension and health-care costs for the elderly, as well as providing medical coverage for the poor -- America's long-term budget shortfall is approximately US$43 trillion, about four times the size of the nation's economy, and more than 20 times the federal government's annual tax revenues.

Some actuaries think even that number understates the size of the problem.
To most observers, it's becoming increasingly obvious that within the next 10 years the U.S. government will simply not be able to borrow money fast enough to keep up with its exploding expenses.

That has huge implications for everything Americans do, from funding the military to protecting the environment. The Economic Policy Institute recently projected that under the current tax regime, by 2014 all government revenue would be consumed by four areas of spending:

* health care for the elderly and the poor
* Social Security for retirees
* national defence
* interest on the debt.

These priorities appear to be ranked in the order they are being disappeared from the US bodget.

There will be no money left for such fundamental initiatives as education, transportation or justice, which means the government would be forced into ever-escalating borrowing to pay for basic programs.

Walker's department projects that, under the current tax rates, interest costs on the skyrocketing national debt would be about half of all government tax revenues by 2031.

Ten years later, the cost of servicing the debt will exceed all government revenues.

If I was a nation to whom the US owed money, I'd worry about being treated like Wilmette, Des Moines, or Evansville. In fact, I'd worry about being treated WORSE than Wilmette, Des Moines, or Evansville.

Those foreign countries don't lend out of the goodness of their hearts; for the most part they lend because the U.S. uses that money to buy goods from them and other nations. In many ways, the prosperity of the developed world, including Canada, Europe and parts of Asia, has been financed over several decades by America's rampant spending, says David Rosenberg, a Canadian who is chief North American economist for Merrill Lynch in New York.
But foreign investors cannot go on forever supporting U.S. spending.
A banker who holds your mortgage and car loan will get nervous if you keep coming back to up the limit on your credit cards [and aren't paying all of your financial obligations?], and international debt markets work in much the same way. The question becomes, how much longer will those investors be willing to lend to the U.S., especially at the current low interest rates, when the country appears to have no plan for meeting its long-term funding needs?

The issue is even more pressing given the fact that the U.S. dollar has been falling for more than a year, decimating returns for those foreigners who invest in U.S. bonds.

History provides some harrowing examples of what happens when an economy collapses under the weight of unsustainable debt. One of the most chilling is Argentina in 2001.

When the International Monetary Fund cut off its support for the country's escalating debt, the effect was catastrophic: the value of the national currency plunged, decimating the savings of millions. The resulting surge in inflation and sudden slowdown in consumer spending put thousands of businesses into bankruptcy within weeks. That, in turn, put further millions out of work and pushed one of South America's biggest economies into a punishing recession.

As unfathomable as it may seem, most economists think something like that could happen in the United States.

"If foreign investors look at the long-run outlook for the federal budget and decide there is going to be a crash, you get a financial panic," Bivens explains. "Interest rates spike. That causes a huge recession. You'll have the dollar falling fast, so maybe inflation is sparked at the same time." And if interest rates spike, that would squeeze millions of U.S. consumers who have taken out loans against the rising value of their homes in recent years. A sudden hit to the real estate market would further constrain consumers' wallets, leading to a cycle of lower spending, and deeper recession, Bivens says.

Virtually every reputable independent observer who has looked at the United States budget shortfall concludes that some combination of significant tax increases and major spending cuts is unavoidable. But making those reforms happen, and closing that budget gap, will require the kind of deft touch used to dismantle a bomb.

* The American currency must be slowly, carefully managed lower to boost U.S. exports, but without triggering a sudden plunge in the greenback that could spark a devastating jump in inflation.

* Interest rates must gradually rise to ward off inflation and encourage consumers to save more of their earnings.

* Spending must be reined in, but not so severely that it compromises U.S. security and other public priorities.

And taxes must be raised, but not so drastically that they stunt economic growth.
Walker stresses the need to make "tough decisions," and none will be tougher than tackling the runaway costs of providing health-care coverage for the elderly and the poor.

Remember that hierarchy I listed above? That's the first thing listed - and looks like the first thing to get cut. Currently, Bu$h is touring the country - when he's not signing a law saving Terri Schiavo in contradiction to a law he signed in Texas - promoting the abandonment of Social Security. All of his world domination plans fall apart once we can no longer maintain a military, and then the creditors take the country apart to satisfy their due.

What a future! Thanks, George! Thanks for everything!

But telling voters that they will have to pay more in taxes for fewer services is not an easy sell, and so far no politician has been willing to try it.

In February, Bush tabled a proposed budget that would eliminate or trim back 150 government programs, but even with that, the U.S. would be racking up deficits well in excess of US$200 billion for years to come.

"They're not being serious about austerity at all," Bivens says. "They're talking about very big cuts to very small programs. They mean a lot to the people getting them, but it's pennies in the overall fiscal problem."
James Horney spent more than seven years as a staffer at the Congressional Budget Office and now does analysis for the Center on Budget and Policy Priorities, a non-partisan think tank in Washington. He says the solution to the debt problem can only emerge when both parties in Congress and the President sit down to work out a "grand bargain" that includes concessions on both taxes and program spending, and a strategy for reassuring international lenders.
"It requires a deal in which everything is on the table and everyone is at the table," Horney says. "One just hopes it will happen before some major cataclysm."

Have things improved any? Not yet. But some economists see some hope, and the source of this hope is:

Golden opportunity for China

The clock is ticking.

There are two key risks that mainland policy-makers face the longer they hold fast to the currency status quo.

Firstly, there are the massive foreign capital inflows causing economic distortions in China. Authorities have succeeded in neutralizing the worst visible symptoms of surging hot money inflows into the economy. Inflation, for example, began edging down four months ago. But such success is likely to be transient because the underlying disease - that is, excess capital inflows - remains untreated.

Secondly, the longer authorities wait in moving to a flexible exchange regime, the riskier it becomes for China to liberalize its capital account.

Fortunately for mainland policy-makers, a conventional currency adjustment is not their only available path; a yuan peg to gold shines the way to a face-saving alternative.

Lest anyone get the wrong idea, this is not to imply China's leaders ought to ignore the failed history of the gold standard by adopting one of their own. The idea is simply that China temporarily pegs its currency to gold to facilitate an exit from the insidious clutches of a de facto fixed currency regime and lay the foundation for an eventual transition to a fully floating one.

Gold is often dismissed as a potential monetary anchor for developing economies like China because of the pre-eminent role the US dollar plays in global trade and financing. A peg to the dollar minimizes currency risks for foreign lenders and direct investors, and facilitates capital inflows that are so essential for economic development in capital-poor countries.

This old shoe no longer fits, however, as reflected in China's bulging balance of payment surpluses and exploding foreign exchange reserves, which grew by US$206 billion (HK$1.6 trillion) last year alone.

Opening the capital account to relieve speculative pressure on a currency, however, is a dangerous expedient for a country with a weak financial sector - analogous to poking holes in a structurally flawed dike. A peg to gold would immediately inject flexible market dynamics into the yuan's exchange rate with the dollar without risking the political and practical repercussions of conventional currency adjustment alternatives. As the gold price rises, the yuan/dollar exchange rate will appreciate, and vice versa.

Such exchange rate flexibility provided automatically by gold would serve an invaluable stabilizing function for the economy. When the gold price falls over some weeks or months, this is commonly interpreted as a sign of a relatively tighter US monetary policy, ie fewer US dollars are available for a given global supply of gold.

In response to changing global liquidity conditions, therefore, the gold price would produce exactly what the doctor ordered in the form of the required currency depreciation or appreciation versus the US dollar.

This rise in the gold price, reflecting an enormous reflation of global dollar liquidity, would have resulted in an appreciating yuan, thus counteracting the pernicious effects of the speculative pressures that have fueled, and continue to fuel, a deluge of foreign capital inflows into the economy.

Consensus among the policy and business elites in Beijing has hardened around the idea that a flexible exchange rate regime is inevitable if China is to achieve its goal of becoming a great power again.

A peg to gold is not perfect, but it provides the least harmful option of many.

Go on, China, go for the gold, or risk derailing your destiny as a once and future global great power.

They might as well. Under Bu$hCo, the starring role in world leadership is currently vacant.

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pessimist :: 7:12 PM :: Comments (1) :: Digg It!