And then there is California - $20 Billion Deficit

Not to be outdone, there is California with a $20 Billion deficit. One problem that is inherent in the system is that we have been living in a dream world of sustained growth and thus more revenue from taxes. But all the money is in China (more on that later). With China holding $3 Trillion, because of the trade deficit, that is money that is not taxable.

"Our forecast of California’s General Fund revenues and expenditures shows that the state must address a General Fund budget problem of $20.7 billion between now and the time the Legislature enacts a 2010–11 state budget plan. The budget problem consists of a $6.3 billion projected deficit for 2009–10 and a $14.4 billion gap between projected revenues and spending in 2010–11. Addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier this year."

http://www.lao.ca.gov/2009/bud/fiscal_outlook/fiscal_outlook_111809.aspx

New Jersey - Take 2

Earlier we wrote of the about the deficit haunting New Jersey. It seems that it was just part of the story. It did not take account of the pension fund which has an accumulated deficit of $46 billion.

Not to pick on NJ, but this shows the predicament that states have gotten themselves into. With few exceptions, most of the country faces similar problems.

http://www.businessweek.com/news/2010-02-25/new-jersey-pension-deficit-grows-to-46-billion-update2-.html

Fox Interview of Pres. Obama on Healthcare

Recently Bret Baeir of Fox News interviewed Pres. Obama regarding health care. My only comment is that I hope in the future that Fox News give the same respect to Sarah Palin that they gave Pres. Obama. After all, they are fair and balanced.

Actually the more I think about it, is there any way we can get Bret to interview Sarah Palin?

http://video.foxnews.com/v/4113350/fox-news-exclusive-president-obama/?loomia_ow=t0:s0:a16:g2:r5:c0.037577:b31982604:z6

Microsoft Data Centers

How many data centers does Microsoft have? According to the following article, more than 10 and less than 100. Obviously Microsoft wants to protect its data (not unlike Google and others). This is a short article about what Microsoft has, the pictures are cool as are the videos.

http://gizmodo.com/5495174/this-is-the-cloud-inside-microsofts-secret-stealth-data-centers

New Jersey outlines its deficit - $11bn

One by one, the states are showing the desparate shape they are in. Previously we mentioned how Illinois had a deficit of $13bn, consider New Jersey with a deficit of $11bn. This is just the beginning of a long decline of states being able to meet their fiscal responsibilities. Furthermore, this reaches much further down as municipalities also face growing deficits. While "economists" (the same ones that couldn't or wouldn't predict the financial collapse) tell us that the US is no longer in a recession, states are reeling from unprecedented deficits.

http://www.newjerseynewsroom.com/state/new-jerseys-state-budget-deficit-could-reach-11-billion

Financial Warfare - Part 1

This blog begins a new thread that I want to discuss and maybe get feedback. I have discussed much in the nature of the current financial status (and there is more to come). Most of it giving information about the "numerology" of the economic world. Also I have discussed some aspects of cyber-conflicts.

The topic that I want to consider is "financial warfare", by this I mean the ability of a nation or an organization (NGO) to "attack" the economic wellbeing of a sovereign state. The attack can come in many forms, open or covert. It can come through currency manipulation, aggravated marketing, cyberattacks on the bank system, etc. The purpose being to manipulate the country into certain behaviour or just plain terrorism. The dependence of a nation on the Internet makes covert or cyberattacks more probable, just consider the recent attacks on Estonia allegedly by Russia. [http://en.wikipedia.org/wiki/2007_cyberattacks_on_Estonia]

I would consider "vanilla" financial warfare as being an open (non-cyber) attack on the financial condition of a nation. One form of financial warfare is the sanctions placed on countries that don't comply to specific demands. Consider banking restrictions on Iran, implementing severe restrictions on Iran to do business due to imposed restrictions on how much business it can do can be considered a form of financial warfare. But "financial attacks" can be more immediate.

One of the most flagrant financial attacks was by the US against a supposed ally, Great Britain, during the 1956 Suez Canan crisis. In an article in "Wired" magazine,

"During the 1956 Suez Canal crisis, for instance, President DwightEisenhower used market pressures to keep the UK and France from attacking Egypt by ordering theTreasury Department to flood the market with the Sterling. "This depressed the value of the British pound, causing a shortage of reserves needed to pay for imports," writes Yale management professor Paul Bracken. "The message quickly got through to London, which, along with Paris, soon pulled out of the Canal."
[http://www.wired.com/dangerroom/2009/03/finance-threat/#ixzz0gVKwGQq2 ]

What does this mean for the US? Consider how much the US financial system is leveraged, the ability of China to pursue actions not unlike what the US did to Great Britain is not out of the question. Can (or will) China be able or willing to "punish" the US for actions it (China) considers objectionable is certainly not out of the question. Recently Chinese PLA (Army) officers urged the sale of US bonds as a punishment for US sales of weapons to China. While this did not happen, the future is less certain. [http://www.reuters.com/article/idUSTRE6183KG20100209 ]

Another aspect to consider is the role on NGOs. Given the amount of money that is held by private organizations, it is not out of the question that these entities could do serious harm to the wellbeing of nations. While probably not a hostile attack, consider the role of Goldman Sachs in creating the financial crisis in Greece.

GM ... Telecom Execs take over

Is it possible for GM to get into more trouble? Well, consider that Pat Russo has become lead director. Pat Russo was the Lucent CEO during the Alcatel takeover. She became the CEO of the mergered companies before being replaced recently. As the article states two other directors have serious Telecom backgrounds.

Considering Nortel, Lucent, and other Telecom companies, maybe a Telecom background is not the the right model for GM or the auto industry. Maybe a more successful corporate business model would be more beneficial for GM. Let's see banking, NO, manufacturing, NO; can't think of a recent success story for a large scale company in the US.

In any case, we can only hope that GM is successful. For I do believe that manufacturing of any kind is beneficial to the wellbeing of the US economy.

http://www.bloomberg.com/apps/news?pid=20601108&sid=a1SlWVy9fwvw

Weakness found with RSA

Just a quick post for the techie at heart. RSA is a commonly used encryption method found just about everywhere.

According to the article

"The scientists found they could foil the security system by varying the voltage supply to the holder of the "private key," which would be the consumer's device in the case of copy protection and the retailer or bank in the case of Internet communication. It is highly unlikely that a hacker could use this approach on a large institution, the researchers say. These findings would be more likely to concern media companies and mobile device manufacturers, as well as those who use them."

http://www.ns.umich.edu/htdocs/releases/story.php?id=7551

All the money in the world - Part 3

Let's continue with the numbers. I'll try to wind down a little on this topic. But given the numbers, I would say there is no good news regarding the US economy. No matter what the experts say!

It seems that everyone is fixated on the stock market or the job numbers. But to me the only number that matters right now is the trade deficit, not the budget deficit althought it is important as well. Between the trade deficit and interest payments on US government borrowing, dollars seem to be the major export commodity. So let's look at the numbers.

The GDP of the US in 2008 was roughly $14tr. The GDP of the "world" ( sum of the GDPs of the countries of the world) is roughly $60tr. Remember that this year 2010, the US debt is $14tr. That is roughly 100% of the GDP. In 2009, the interest payment was $189bn of which 50% goes into foreign hands.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

So here are the numbers regarding the federal budget. This is a little off as the income stream is from 2007, but assume that the numbers have not changed drastically in the following years. Although presumably with the increase in unemployment and lower profits, there will be some decrease in tax revenues.

US Income: about $2.7tr (in 2007 before refunds)
US Budget: $3.6tr (approx.)
$2.2tr mandatory
$1.4tr discretionary
-------------------

So again roughly, the US is about $1tr in the hole. Needs to borrow. And, of course, the current lender of choice is China. Let's see why.

Of the foreign debt, approx. $3.7tr, China and Japan hold about 45%, which is $1.66tr. But that is not the entire story, China held $2.4tr at the end of December 2009 in foreign reserves. This is obviously due to the trade imbalance between China and the US. Also the US is paying $189bn in interest payments, of which approx. $45bn is going to China. So what does it mean to hold more in IOUs than the entire amount of cash that the US has?

The US trade deficit with China in 2009 was $227bn. In 2008 the deficit was $268bn; $258bn, $234bn in 2007 and 2006 respectively. In fact you need to go all the way back to 1985 to get a semblance of parity. This is the reason that China has become the bank for the US. When the US government needs to borrow money, the place to go is China. And to reiterate, the reason that China is the lender of choice is because of all the stuff we have bought from China.

So the other unfortunate part to this, is that there is all that money that can't be taxed! The more money the US gives to China, the less amount of wealth there is in the US to be taxed.

http://www.census.gov/foreign-trade/balance/c5700.html

So what is the answer?

Clearly the US and the Obama administration have been trying to get China to raise the value of their currency. This would make imports more expensive and presumably make Chinese imports more expensive. People would spend less on Chinese products, and thus lowering the trade deficit.

Does China want to continue funding the US economy? In the following article, Kenneth Rogoff argues that the next move is for China.

"China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off. But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow."

http://www.project-syndicate.org/commentary/rogoff61/English

Far for me to disagree with Prof. Rogoff, but I will.

The US has a problem, and it is up to the US to solve it, not wait for external events to fix it. The problem is the consumption that Prof. Rogoff talks about. But more to the point it is consumption for cheap goods. We can call it the "Walmart Syndrome" or the US, the "Walmart Nation". Buy lots and buy it cheap. If fact make it so cheap, that US manufactures can't produce the goods because of all the federal and state "safety" nets that don't exist in China. There is certainly a moral question that we can explore in another blog.

Bottom line, the US needs to bring back manufacturing of goods that are currently imported at the cost of over $200bn annually. So as a nation, is it really cheaper to build goods overseas? Probably not. Lost jobs, and lost tax revenue both at the state and federal level. It just seems cheaper when you look at the price at Walmart, forgetting that is being subsidized by the US government with a BIG credit card.

Enough for now, more on jobs in a later blog.

Other Holders of Dollar Wealth

Just a quick prelude for another topic.

According to Forbes magazine, the combined wealth of the first 35 richest Americans is roughly $500bn. It is not difficult to calculate that 400 Americans have in excess of the total physical money supply of the US. Furthermore, 400 Americans control over 10% of all the cash in the US, this includes M0 through M3.

http://www.forbes.com/lists/2009/54/rich-list-09_The-400-Richest-Americans_Rank.html

If that is not bad enough, just a few "Tech Giants" hold $265bn. So while the unemployement rate hovers around 10% (or 18% effectively), American companies are sitting on a pile of cash.

http://247wallst.com/2009/11/12/tech-giants-now-hold-265-billion-cash-to-spend-hpq-coms-intc-amd-msft-csco-aapl-goog-orcl-java-qcom-emc-yhoo-dell-amzn-ebay-ont-brcd-jdsu-star-vmw/

...

Is seems to me that there is something wrong when China and a few individuals and corporations hold some much wealth while the US federal government struggles with finding money to pay for unemployment benefits.

The Economic Destruction of Illinois

In a previous post regarding the financial condition of the US, I mentioned that for the time being I would not consider state issues. This post is a little detour.

The state of Illinois has an estimated $13bn deficit. That number is one-half of the revenues that the state brings in. Of course the revenues of $27bn is also an estimate for this year. Furthermore, the pension systems are underfunded to the tune of $62bn. In one county, the sheriff's patrol cars have been repossessed.

There is no way that Illinois can recover without federal aid. But that is only Illinois, what about California? New York? For example, California faces a $20bn deficit. And that is for the current fiscal year. Next fiscal year, 2010, the shortfall is predicted to be $40bn.

As reported by The Telegraph, according to the Economic Policy Institute states face a shortfall of $156bn in fiscal 2010. In any case, the federal government can only subsidize the states for a limited period of time. So while the President and Congress fiddle with health care and wars, Rome is burning.

http://online.wsj.com/article/SB10001424052748703795004575087733732827118.html

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7338857/Dont-go-wobbly-on-us-now-Ben-Bernanke.html

http://sunshinereview.org/index.php/State_budget_issues,_2009-2010