In a previous post I wrote about the monetary issues plaguing Illinois. Well it has not gotten any better. By the end of June, the state needs to pay over $7 BILLION which it does not have. According to the following article, "Mr. Quinn presented a budget in March that would still leave the state with a $10.6 billion deficit. ". Mr. Quinn is the current governor of Illinois.
So if you think Illinois bares no resamblance to Greece, think again. Once Illinois has to make deep cuts to its budget, will there be people with bricks in the streets. I guess we will see.
But as in Greece the legislature is unwilling to make appropriate changes to how money is spent. Acting in a cowardly fashion, saving their electoral skins, they will defer making important decisions until it is too late.
"Illinois Comptroller Daniel Hynes said in his April report that the state's cash position for the quarter ending June 30 "looks exceedingly difficult." By June 10, Illinois must repay $1.75 billion, plus interest, in short-term borrowing.
Meanwhile, the state still owes billions of dollars to hospitals, universities, social-service providers and others. Mr. Hynes said the state's backlog of unpaid bills probably will exceed $5.5 billion at the end of June."
http://online.wsj.com/article/SB10001424052748703686304575228582377071698.html?mod=WSJ_article_LatestHeadlines
Showing posts with label US Debt. Show all posts
Showing posts with label US Debt. Show all posts
Friday, May 7, 2010
Saturday, April 3, 2010
Pension Debt
It is amazing that whereever you turn in the US, there are huge amounts of debt. Besides the federal and state spending, consider pension funds in the various states. Furthermore, these pension finds are guaranteed by state constitutions, which means they MUST payout before payroll and other state obligations.
One of the most debt-ridden entities in the US seem to be pension funds. As we have mentioned in the past states like New Jersey have an acculmated pension deficit of $46B and the city of Chicago alone has a pension deficit of $18.5B. While Illinois itself has a pension deficit of $35B. Other states and municipalities are not necessarily in better shape.
http://articles.chicagotribune.com/2010-03-07/news/ct-met-public-pensions-cost-0308-20100307_1_pension-funds-public-pension-funding-deficit
http://www.chicagobusiness.com/cgi-bin/news.pl?id=8191
And yet the pension funds continue to play Russian roulette with their funds expecting Vegas-like returns. Consider the following item reported in the NY Times. The pension funds "gave" private equity firms $17B just so that they can have illiquid assets.
"The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns. [http://www.nytimes.com/2010/04/03/business/03equity.html]
One of the most debt-ridden entities in the US seem to be pension funds. As we have mentioned in the past states like New Jersey have an acculmated pension deficit of $46B and the city of Chicago alone has a pension deficit of $18.5B. While Illinois itself has a pension deficit of $35B. Other states and municipalities are not necessarily in better shape.
http://articles.chicagotribune.com/2010-03-07/news/ct-met-public-pensions-cost-0308-20100307_1_pension-funds-public-pension-funding-deficit
http://www.chicagobusiness.com/cgi-bin/news.pl?id=8191
And yet the pension funds continue to play Russian roulette with their funds expecting Vegas-like returns. Consider the following item reported in the NY Times. The pension funds "gave" private equity firms $17B just so that they can have illiquid assets.
"The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns. [http://www.nytimes.com/2010/04/03/business/03equity.html]
Jobs, Jobs, Jobs
The end of the week seemed to be a public relations coup for the Obama administration. They exalted in the employment figures which indicated that payrolls rose by 162,000 workers. And all the paundits were saying how the employment numbers grew by the most in 3 years. All this seems to indicate that the recession is over and happy days are here again.
http://www.bloomberg.com/apps/news?pid=20601010&sid=aDCWdea8_JO0
But in my view there is no silver lining, the US continues to live off printing money. This is indicated by the trade deficit numbers. Consider the deficit numbers in January. There was a deficit of $37.3B. As we have preached in the past, the US must become more self sufficient in manufactured goods. While the US struggles to blame China for currency manipulation, there is no effort to try to deal with increasing manufacturing in the US itself. This is akin to blaming the drug supplier for the demand of the drug user. Irrespective of whatever monetary policies the Chinese chose to follow, the US should encourage in every way possible the return of manufacturing items back to the US. The US must relearn to make shoes, shirts, hats,etc.
And while it is necessary not to begrudge anyone getting a job, it is also important to understand that the more money the government throws into the system, the more likely it is that some if not most of that money will leave the US. Thus incentives like federal-back infrastructure jobs (not to mention the current increase of census workers) hire people (a good thing), pay them so that they can spend money on imported necessities. So the government creates more money only to see that money (or a good portion of it) leave its shores. Again this is not sustainable.
So the bottm line, solving the recession or making the US a strong economic (viable) country is NOT about more jobs, it is about creating an environment so that manufacturing companies are more likely to build in the US. Once that is done, the jobs will come!
"The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Departmentof Commerce, announced today that total January exports of $142.7 billion and imports of$180.0 billion resulted in a goods and services deficit of $37.3 billion, down from $39.9billion in December, revised. January exports were $0.5 billion less than December exportsof $143.2 billion. January imports were $3.1 billion less than December imports of $183.1billion."
http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
http://www.bloomberg.com/apps/news?pid=20601010&sid=aDCWdea8_JO0
But in my view there is no silver lining, the US continues to live off printing money. This is indicated by the trade deficit numbers. Consider the deficit numbers in January. There was a deficit of $37.3B. As we have preached in the past, the US must become more self sufficient in manufactured goods. While the US struggles to blame China for currency manipulation, there is no effort to try to deal with increasing manufacturing in the US itself. This is akin to blaming the drug supplier for the demand of the drug user. Irrespective of whatever monetary policies the Chinese chose to follow, the US should encourage in every way possible the return of manufacturing items back to the US. The US must relearn to make shoes, shirts, hats,etc.
And while it is necessary not to begrudge anyone getting a job, it is also important to understand that the more money the government throws into the system, the more likely it is that some if not most of that money will leave the US. Thus incentives like federal-back infrastructure jobs (not to mention the current increase of census workers) hire people (a good thing), pay them so that they can spend money on imported necessities. So the government creates more money only to see that money (or a good portion of it) leave its shores. Again this is not sustainable.
So the bottm line, solving the recession or making the US a strong economic (viable) country is NOT about more jobs, it is about creating an environment so that manufacturing companies are more likely to build in the US. Once that is done, the jobs will come!
"The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Departmentof Commerce, announced today that total January exports of $142.7 billion and imports of$180.0 billion resulted in a goods and services deficit of $37.3 billion, down from $39.9billion in December, revised. January exports were $0.5 billion less than December exportsof $143.2 billion. January imports were $3.1 billion less than December imports of $183.1billion."
http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
Wednesday, March 17, 2010
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 ]
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.
Wednesday, March 3, 2010
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.
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/
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.
Wednesday, February 24, 2010
All the money in the world - Part 2
To continue the thread we started in the earlier article, there are certain statistics that we did not cover. Thus we need to collect more information about how much money there is and how much is used and how much is created. Sometimes this is like comparing apples to oranges as data is available from different years. But hopefully the scale of the issues will become clear or clearer based on this information.
Also the information presented deals with the US as a whole, we did not present a state by state debt totals. These are probably very significant given the size of the economies of California, New York, Texas, etc.
The information that was not covered includes the budget of the US. Here is the tax revenue for the federal government for the year 2007.
It is about $2,691,538,000,000 or about $2.7 trillion in 2007 before refunds.
On Feb. 12, 2010, President Obama signed into law an increase to the federal borrowing limit by $1.9 trillion The federal government can now borrow $14.3 trillion. This is evidently what the federal government needs to function for the rest of the year. The House had already approved this several weeks ago.
US Budget
Mandatory spending: $2.184 trillion
Discretionary spending: $1.368 trillion
[http://en.wikipedia.org/wiki/2010_United_States_federal_budget ]
The following article from Bloomberg discusses the nature of public debt in order to finance growth. This has been the success story of America's economy till now. The problem is that
there is too much debt already. In the past when a recession is occuring, the government goes into deficit spending in order to jumpstart the economy. This has worked well in the past. There is concern that the current debt just does not allow for the same type of measures as in the past.
[http://www.bloomberg.com/insight/america-tied-up-by-record-debt.html]
Private Debt
Mortgages
The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007, and again to2.8 million in 2009, a 21% increase vs. 2008. This is a little dated, but it only has gotten worse.
Student Loans
There is an estimated $730 billion in outstanding federal and private student-loan debt, says Mark Kantrowitz of FinAid.org, a Web site that tracks financial-aid issues—and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means that payments and interest are halted, or in "forbearance," which means payments are halted while interest accrues.
http://online.wsj.com/article/SB10001424052748703389004575033063806327030.html?mod=WSJ_hp_mostpop_read
http://online.wsj.com/article/SB10001424052748703389004575033063806327030.html?mod=WSJ_hp_mostpop_read
Credit Cards
There were 26.5 billion credit card transactions in 2008, totalling $2.1 trillion. That's up from 21 billion transactions totalling $1.4 trillion in 2003. (Source: Nilson Report, December 2009)
At the end of 2008, Americans' credit card debt reached $972.73 billion, up 1.12% from 2007. That number includes both general purpose credit cards and private label credit cards that aren't owned by a bank. (Source: Nilson Report, April 2009)
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
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