“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.

“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.”

“No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact. The decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight.

“...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.

“Earlier I mentioned the Fed’s dual mandate to manage growth and inflation. In the long run, growth cannot be sustained if markets are undermined by inflation. Stable prices go hand in hand with achieving sustainable economic growth. I have said many, many times that inflation is a sinister beast that, if uncaged, devours savings, erodes consumers’ purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency.

“Purging rampant inflation and a debased currency requires administering a harsh medicine. We have been there, and we know the cure that was wrought by the FOMC under Paul Volcker. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.”

*** Mr. Fisher means well. He goes on to tell his audience that they, as voters, must deal with this situation. Since the obligations cannot be met, they must be reduced. Fair enough. But what candidate is going to tell the voters that they must give up their free healthcare? And what voter is going to vote for such a thing?

Mr. Fisher is right about the problem; he is wrong about the solution. The problem will not be fixed by the feds...nor by the voters. Popular democracy – ridden with its lobbyists, insiders and hustlers – will not allow it. Instead, the government will go broke.

July 18, 2008.

Hat tip: Len Salonsky

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We Don't Have What It Takes

The radical changes that are necessary in our government's spending habits and in the management of its fiscal affairs that are required to save our nation from a financial meltdown may however, never be proposed, let alone implemented. The courage and commitment to financial solvency simply does not exist at the Federal level - by Democrats or Republicans. We are not going to solve the economic problems facing America without a moral commitment that is virtually non-existent in politics today. The fatal combinations of corruption and incompetence, of selfishness and greed, and of immorality and laziness make reform all but impossible.

Perilous Days Ahead by 2009

The National Debt of $9 trillion as a percentage of GNP will go from 35% to over 80% under a new wave of federal spending that even raising taxes cannot prevent. Taxes collected now simply go to pay the interest on this debt. Foreign nations now holding $2 trillion in mortgages on American assets will see their 25% stake in our economy increase to over 50% - before they panic and "pull the plug." The Federal government will do nothing to "downsize" itself. In fact, the declining economy will only encourage it to expand its bureaucracy. The Federal government is barely policing or monitoring its current spending. The GAO is an "auditor's joke." Waste and corruption will abound beyond historic levels. We can't stop the "baby boomers" retirement or their increased need for medical services. The $500 billion being paid in benefits to over 48 million recipients will significantly swell in size very shortly and will collapse the economic "safety nets" that are already stretched to their limit. The GAO's own January report entitled "Long-Term Fiscal Outlook is Unsustainable" was an understatement. The truth is we're heading for a serious financial collapse, and not the "minor corrective recession" that is the popular (but manageable) prediction we're hearing from our presidential candidates.

Biting The Bullet

The US Economy is teetering upon a weak foundation that has been fifty years in the making and a fiscal budgetary process that is designed to mislead the average American into thinking that spending more money that's what being collected is acceptable when it comes to running a government over the long-term. Just because we've financed our way out of a 1930's type depression, doesn't mean we can keep it up forever. There will be a day of reckoning...and it will be sooner than anyone imagines.

A. Citizen
March 10, 2008
See: http://www.firesociety.com/article/23019/?src=111

Comments are welcome at redstatepatriot@hughes.net. Please include the title of the article as your subject line. Selected responses, in whole or part, may be published (appended to the article).

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1) They're masters of public relations.

I had no idea how my open-handedness could be made to look, after the fact. At the time I bought the subprime portfolio I thought: This is sort of like my way of giving something back. I didn't expect a profile in Philanthropy Today or anything like that. I mean, I bought at a discount. But I thought people would admire the Wall Street big shot who found a way to help the little guy. Sort of like a money doctor helping a sick person. Then the little guy wheels around and gives me this financial enema. And I'm the one who gets crap in the papers! Everyone feels sorry for the poor, and no one feels sorry for me. Even though it's my money! No good deed goes unpunished.

2) Poor people don't respect other people's money in the way money deserves to be respected.

Call me a romantic: I want everyone to have a shot at the American dream. Even people who haven't earned it. I did everything I could so that these schlubs could at least own their own place. The media is now making my generosity out to be some kind of scandal. Teaser rates weren't a scandal. Teaser rates were a sign of misplaced trust: I trusted these people to get their teams of lawyers to vet anything before they signed it. Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default.

3) I've grown out of touch with ``poor culture.''

Hard to say when this happened; it might have been when I stopped flying commercial. Or maybe it was when I gave up the bleacher seats and got the suite. But the first rule in this business is to know the people you're in business with, and I broke it. People complain about the rich getting richer and the poor being left behind. Is it any wonder? Look at them! Did it ever occur to even one of them that they might pay me back by WORKING HARDER? I don't think so. But as I say, it was my fault, for not studying the poor more closely before I lent them the money. When the only time you've ever seen a lion is in his cage in the zoo, you start thinking of him as a pet cat. You forget that he wants to eat you.

4) Our society is really, really hostile to success. At the same time it's shockingly indulgent of poor people.

A Republican president now wants to bail them out! I have a different solution. Debtors' prison is obviously a little too retro, and besides that it would just use more taxpayers' money. But the poor could work off their debts. All over Greenwich I see lawns to be mowed, houses to be painted, sports cars to be tuned up. Some of these poor people must have skills. The ones that don't could be trained to do some of the less skilled labor -- say, working as clowns at rich kids' birthday parties. They could even have an act: put them in clown suits and see how many can be stuffed into a Maybach. It'd be like the circus, only better. Transporting entire neighborhoods of poor people to upper Manhattan and lower Connecticut might seem impractical. It's not: Mexico does this sort of thing routinely. And in the long run it might be for the good of poor people. If the consequences were more serious, maybe they wouldn't stay poor.

5) I think it's time we all become more realistic about letting the poor anywhere near Wall Street.

Lending money to poor countries was a bad idea: Does it make any more sense to lend money to poor people? They don't even have mineral rights! There's a reason the rich aren't getting richer as fast as they should: they keep getting tangled up with the poor. It's unrealistic to say that Wall Street should cut itself off entirely from poor -- or, if you will, ``mainstream'' -- culture. As I say, I'll still do business with the masses. But I'll only engage in their finances if they can clump themselves together into a semblance of a rich person. I'll still accept pension fund money, for example. (Nothing under $50 million, please.) And I'm willing to finance the purchase of entire companies staffed basically with poor people. I did deals with Milken, before they broke him. I own some Blackstone. (Hang
tough, Steve!) But never again will I go one-on-one again with poor people. They're sharks.

(Michael Lewis is the author, most recently of ``The Blind Side,'' and is a columnist for Bloomberg News. The views he expresses are his own.)

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Assuming an 8% annual economic rate of growth, it will take China about 30 years, assuming 4% annual productivity growth, before it would exhaust this huge pool of unemployed. Can the United States compete with those labor costs for the next 30 years? Not in our wildest dreams! Where do you think the “jobs” will be - where will consumer goods and weaponry be manufactured over the next 30 years? Where will your waffle maker and toaster be manufactured? China and India, of course! If you doubt even for a minute, visit any retail merchandiser in the United States and check each appliance and article of clothing for their origin of manufacture.

Politicians tell you not to be concerned! The United States will still have many jobs. What they don't tell you, either out of ignorance or malice, is that those jobs will be temporary positions. The future holds far fewer jobs for Americans, regardless of individual educational achievement. Predictably, the only real jobs that can lead to measurable wealth will become the province of the elite, and they will be intensely coveted, particularly those with tenure such as "professor" or "congressman." Significant barriers to entry are being erected by the incumbents in those "jobs" as you read this article.

Those among us who are considered less qualified by the elite will predictably clamor for even more income and wealth redistribution. The government’s roster of Americans dependent on income redistribution will continue to grow exponentially. Government dependency has already become typical rather than the exception. More and larger definable groups have begun competing openly and ruthlessly for available taxpayer-subsidized handouts.

Congressmen, consumed absolutely with self-indulgence, self-aggrandizement and power over their fellow citizens, continue to demonstrate they do not have the vision, intellect, ethics, statesmanship, or the will to redirect a nation careening out of economic and social control. From their point of view, everything is as it should be. They rule, we serve. The reality is simple and painfully brutal: your education, your employability and your standard of living in coming years is solely your responsibility, unless you are willing to clean swimming pools or flip burgers while the government augments your meager existence. It would be incredibly wise, but uncharacteristic, for our nation's youth to wake up while the coffee is still warm enough to smell it.

In our modern “global economy,” Americans must quickly come to understand that have to compete with every other nation’s labor as a cost of doing business, from Mexico to China. If an American citizen hopes to earn 10 times as much as an Indian and 50 times as much as a Chinese, he is going to have to produce 10 times or 50 times as much as his competitors in India and China, of equal or better quality, or his job is going to move offshore. Only Rip Van Winkle is unaware that millions of jobs have already fled America to foreign shores as a result of excessive federal and state taxation, burdensome regulation by government administrative agencies (e.g., OSHA, EPA), runaway litigation, personnel benefits which include the cost of healthcare, and employee unions.

Is there one industry in the United States today that can leverage the needed productivity in the coming years? Not likely. Even the U.S. airline industry is on the verge of widespread bankruptcy. The automotive industry, led by Ford Motor Company is in close pursuit. Ford executives are arguably engaged in a form of intentional and self-inflicted corporate suicide, not unlike Jonestown.

What would be necessary to revitalize the American economy quickly enough that it will matter?

Congressmen, those who have the temerity to call themselves our elected representatives, but have forgotten that they are Americans first and foremost, would have to join the team. All employers, with the support of the nation’s citizenry, would have to create a “Team America” initiative not unlike the Kennedy space initiatives and NASA of the 1960’s. All Americans would have to commit to invest massive sums into new equipment (capital investment), vocational and technical training, and invigorate retro-style education solely grounded in mathematics, sciences and focused solely on student excellence. In the interim, free-loaders and race-baiters would have to forego hundreds of billions of dollars of taxation destined for pork projects and income redistribution for political purposes. Not likely ....

What is more likely is that Congress will employ their only other (three-phase) alternative available, (1) cutting your benefits, (2) dramatically increasing your taxes, and (3) undertaking intense social engineering. Their intent would be even more redistribution of power, influence, jobs, education, income, housing, transportation, private property and health care by accelerating socialism and redistributing what wealth still remains. All this will be necessary in order to support those citizens who long ago stopped working with the permission of Congress and state legislatures, and illegal aliens who are willing to work but contribute nothing.

Congress’ choice of the redistribution alternative, in lieu of the “Team America” approach, will cynically be calculated to ensure that politicians, at every level of government, protect and expand their own financial security in the lifestyle of a Hollywood movie star, rock or sports superstar. This they will accomplish by first legislating themselves a special elite status that no other American enjoys, including specialized medical care and exclusive retirement provisions. If that were not enough, Congress has already enacted their own unique ability to solicit, accumulate and keep massive amounts of personal wealth from campaign contributions upon their retirement. The provisions of Congressional retirement, were they to become widely known, would gag most Americans.

There is always a point of peak efficiency given existing technology. Just as there is elasticity in maximizing total revenue, so too is there elasticity in both taxation and income redistribution, which is why, when marginal tax rates are lowered, tax revenues increase. The same concept applies inversely to redistribution entitlements. At some point, excessive prices, taxes, and entitlements all become destructive to maximizing national ‘total GNP’ and economic growth.

Until decision makers are reigned in, and Congressmen once again become citizen legislators who are limited in tenure and not permitted to profit from elected office, decisions from Congress (and courts) will continue to focus on protecting their own self-interests, as a ruling elite class, at the sacrifice of all other Americans. If the economic engine in America is running low on fuel, clearly Congress isn't focused on filling the fuel tank, i.e., making any more fuel (real jobs) or creating better fuel (job training and new technologies). They demonstrate on a daily basis that the only fuel tank that matters is their own.

Red State Patriot would suggest that all Americans get out of debt as soon as possible and be very grateful if you still have a “job.” Be even more grateful if you still have a job two years from now. Hopefully the graphic accompanying this article, as you study it, will become self-explanatory.

Red State Patriot

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The temporary worker, called the “marginal worker,” is often first in the door due to corporate and government reluctance to justify and create new permanent jobs. They’re also first out the door when business conditions deteriorate or some written or un-written standard of performance is not being met.

Government job creation numbers and unemployment statistics would both be far different if the definition of a “job” were more narrowly defined to better differentiate between temporary and permanent employees. Rest assured, with an increase in the minimum wage, permanent employees by the tens of thousands will decrease and temporary workers will increase. (What is it, exactly, that Congress is trying to accomplish?)

The exponential rise in non-union temporary workers in the last decade is a clear sign that employers have adapted accounting principles to human resource departments. Corporations and public entities have shifted their labor costs from being a fixed cost to a variable cost. Rather than bring someone ‘on board’ and pay them a salary, plus traditional or negotiated benefits, companies keep as many non-union workers as possible in temp/flex positions whose workload and work schedules can be adjusted with the vagaries in demand.

With American companies lacking international competitive pricing power (the ability to lower prices significantly and still remain profitable), and input (labor) prices rising rapidly due to government and union regulatory interference with the free market, what can a company do to protect ever decreasing profit margins - short of moving overseas? Very little.

Unfortunately, there is no basis to believe any relief from Federal, State and local regulation, taxation and litigation will be forthcoming anytime soon, given liberal opposition to tax cuts and the collectivist tenor in both Congress and the main stream media. The lumpen who read the print media do not understand how ever increasing taxes and redistribution will render them little more than a servant to the State.

There appears to be only one answer for business and municipalities. The easiest way to boost corporate profitability (or to find more money to spend without increasing taxes, in the case of a municipality) is to lower the most burdensome fixed cost, i.e., labor, and particularly the costs of labor benefits.

It is especially important to recognize that the definition of ‘economic necessity’ has changed dramatically in recent decades to include new personal consumption necessities, real and perceived, such as state-mandated taxes and fees, all forms of insurance, transportation needs, communications ability, health care and education. The historical concept of ‘disposable income’ ignores these new financial requirements in our rapidly evolving society and fails to account for these increasing “fixed costs” to the average citizen and family.

As more and more essential family expenses are added to the real or perceived list of necessities, disposable income diminishes, and with it – consumption expenditures. Americans, faced with this economic nightmare, compensate first with two working parents, then multiple jobs, and now families are confronted with the reality that jobs are becoming more difficult to obtain. In the meantime, Congress, living extravagantly on the backs of taxpayers, is either clueless or without conscience. You would think they would call a cab.

Given the rush of money both into the stock and precious metals markets, and rising equity and real estate prices over the last several years, how could the standard of living decrease? The household sector has actually become the biggest buyer of stocks, buying 400-500 billion dollars of equities, despite the fact that real incomes were, and still are, falling. The answer is not complicated. Much of the money actually used to purchase equities and real estate did not come from increased corporate earnings and growing employee payrolls. It came instead from all forms of consumer debt. Even increasing taxes taken in at all levels of government under the guise of economic prosperity are not being funded by business profitability, but by consumption expenditures fueled by consumer debt.

Lower interest rates, engineered by the Federal Reserve, encouraged most consumers to re-mortgage their homes, many multiple times, taking cash out, which became “found income” as opposed to earned income. Predictably, mortgage debt rose as did all other forms of consumer debt.

Where did all the money go? It became an undisciplined and obscene "spending spree."

In most cases, the average household is still running a cash flow deficit, i.e., spending more on consumer goods (e.g., beer) and capital items (e.g., cars) by funding purchases at the margin with new debt, rather than making consumption purchases and paying taxes with household earnings from cash flow (wages) or savings. The "average" American household debt, including vehicles, personal loans and credit cards, and excluding mortgages, is more than $25 thousand dollars. The cash shortfall in funding these consumption levels has been close to 150 billion dollars each year for at least through 2006. At some point the debt must be repaid. When that day comes, the consumption of some (many) goods and services is going to have to be deferred.

If real wages of Americans have really gone down over the last ten years, why has the cost of labor to corporations gone up so dramatically? The answer can be found in the footprints of several culprits, most of which are traceable back to an endless list of ill-advised decisions of Congress, plus state and local governments, all of whom are treading ever deeper into socialist quicksand with regulation, taxation and redistribution of everything of monetary value in society, i.e., housing, transportation, medicine, education, employment, income, and food. Karl Marx would be proud.

Health insurance premiums have risen at double-digit rates, predictably spurred on by government subsidy of healthcare, with no end in sight. The same can be said for education. Other personnel costs (workers compensation, overtime, turnover, training, litigation, union negotiated benefits, and retirement) have also been rising at double-digit rates. This is potentially bad news for every American. Even though employees progressively receive less disposable income as employer personnel costs are shifted to the employee, employers are still under tremendous pressure to cut Human Resource benefits and costs even further or simply get rid of permanent employees.

If you accept as an economic fact that increasing the Minimum Wage reduces entry-level employment opportunities, why does any American think that increasing human resource benefits doesn’t similarly reduce mid-level employment? The more the "benefits" costs go up in America, the availability of mid-level jobs becomes fewer, and the less competitive America becomes with India and China and other emerging nations. Just as millions of people immigrated to America because conditions were not conducive to economic survival in their native lands, it is imperative now to understand that jobs are leaving America for a reason.

And here we have another little wrinkle in the fabric of today’s culture. Corporate managers and governments, both city and state, no longer have the luxury of loyalty – neither to their shareholders nor to their workers/employees. The leadership pays itself extravagantly (as does Congress) but treats employees (Americans) as inventory. The idea seems to be to cut costs on everything but themselves, to hire the cheapest employees, often illegal immigrants, just in time, in order to meet short-term objectives.

Nobody holds anything in business inventory anymore. There are no excess products on the shelves, no excess money in the bank, and particularly no excess employees on the payroll. Inventory is an expense item and employees in America have become inventory.

Sources of further cost reduction are already becoming harder to recognize! Eventually, business and government managers will run out of costs to cut, including employee benefits. Then what?

Don’t gloss over the question, “Then what?” The North American Union?

Red State Patriot

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A key reason for the concern is the real estate "bubble." Residential real estate assets accounted for more than two-thirds of recent GDP growth, not wages. Now that the real estate boom is coming to an end, or at least appears to be cooling substantially, the potential exists for serious consequences to the U.S. economy.

Consumers understandably tend to look for cheaper alternatives to new cars when the economy begins to show weakness, and right now consumers are faced with historically high fuel prices, a real estate market that has leveled off and declining in some geographic areas, and the gradually declining value of the U.S. dollar. As a result, the price is going up on imported goods which are no longer produced in the United States.

The Federal Reserve masterfully engineered low interest rates which stimulated not only business activity, but real estate development, home re-financing and home equity loans. In the past several years, the consumer has been taking money out of his house just to keep going. Fistfuls of money. Truckloads of it. Over the last two years alone, $1.352 trillion of equity has been extracted - an amount equal to about 10% of annual GDP.

The consumption expenditures that resulted powered much of the economy in recent years. The spending binge, which couldn’t last, is coming to an end. While consumer debt levels have become staggering, Congress still is in no mood to stop spending. Real wage increases have been modest and don’t begin to offset rising employee “benefit” costs, inflation, and higher taxes that were instituted by state governments immediately after the Bush Administration's federal tax cuts.

Aggravating the situation is the growing world demand for petroleum products, political unrest in the Middle East and the Islamic Wars. Congressional liberals have refused for decades to develop any new energy sources or permit construction of nuclear power plants or refineries. If the United States were to experience a national emergency and attempted to make up for lost time and opportunities, it would still take ten years to bring any refinery or nuclear facility into production, assuming environmentalists, state and federal courts, and Congress would acquiesce. As a result, consumers will continue to be pinched harder by higher (and still climbing) fuel prices and taxes, and the slumping real estate market is making it more difficult to extract any asset equity to purchase a vehicle (or other durable goods).

Decide for yourself if you think the United States is on the verge of a recession. In any event, it would be wise to begin to eliminate any accumulated household debt as quickly as possible. You do not want to run out of money before your bills are paid (if you are young), and you definitely do not want to run out of money before you die (if you are enjoying the final years of a good life).

Remember, the severity of any economic downturn cannot be predicted.

Red State Patriot

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