The Federal Government of these United States of America is partially closed down. Congress is divided against itself: the Republican-controlled House of Representatives can't agree with the Democrat-controller Senate on how to reopen.
More ominous, all pundits agree, is that the national debt will hit the debt ceiling sometime soon, with October 17, 2013 frequently given as an estimate. Since the federal government continues to run a budget deficit, its debt is increasing. The ceiling is $16.7 trillion.
The debt ceiling is artificial in the sense that it is legislated by Congress (and signed into law by the President). It can be raised or lowered by Congress. Those who believe the national debt is not a problem (or, misinterpreting Alexander Hamilton and John Maynard Keynes, is actually an asset) might want to just abolish the ceiling, or set at at $30 trillion and forget it for a couple of years.
There is a real debt ceiling, however. It does not have a definite number on it, but it is real enough.
Consider, as an analogy, propeller-driven airplanes. Each model of airplane has a ceiling, because air thins are you climb to higher elevations. The better designed and lighter the airplane and the more powerful its thrust (from the engine and propeller system), the higher the ceiling. But at some point every airplane stalls: its propeller cannot push enough air to give enough thrust to get it higher.
Likewise where the real debt ceiling is for the federal government of the United States depends on a variety of factors. For instance, if the government could raise more in taxes (by raising rates or because of an expanding economy), it would have a higher ceiling than if revenue from taxes fell.
If the federal government offers higher interest rates (which are set at auction), then investors should be willing to loan more money to it.
Investors, in fact, are the key actors. There are all sorts of investors who buy federal debt. Since the Great Recession began they have accepted very low rates of interest. More investors might buy federal debt if interest rates on the debt were higher.
But no matter how high interest rates go, there is still a ceiling. Even a loan shark charging interest (at perhaps 100% per year) to the federal government would stop loaning if it became clear that the loan could not be repaid. And who's going to break the legs of the federal government?
If the annual interest on the federal debt begins approach a high share of annual federal revenues, the federal government would go into a Death Spiral. Say the interest reached one-half, or 50% of annual revenues. Policy makers would have three basic choices. They could prioritize interest payments by cutting federal spending. But that would hurt the economy, resulting in lower tax collections the following year, plus there would be political fallout from the many Americans who depend on federal spending.
A second choice when interest on the debt reaches 50% of annual revenue would be to increase taxes so that spending could be maintained along with interest payments. The problem with that is that such taxes would have to be broadly based. The economy would go into a depression, lowering tax collections.
A combination of cutting spending and raising taxes might work today, but would just cause a depression if we wait until interest hits 50% of revenue.
A third choice is to simply let the debt balloon. But as the debt balloons, the interest would also balloon. Interest rates would have to go even higher. The necessity for defaulting on, or writing down, the debt would be obvious. The debt would quickly hit the real debt ceiling, but that would not stop the death spiral. If 50% of federal revenue were assigned to just pay the interest, it would not be enough. Bonds (federal debt) come due at intervals: the principle would have to be repaid. Just to replace the bonds would require higher interest rates, so the interest would soon consume 51% of revenue, then 52%, and on up to 100% of revenue.
Clearly the three choices above would lead to the end of the United States as we know it. A fourth possibility would be allowing inflation to reduce the real value of the debt. Long-term bond holders would just have to eat their losses. But even this would not likely work because it also would hurt the economy so badly that we would have a depression, which would be deflationary, defeating the purpose of allowing goods and services to inflate in dollar value.
The real debt ceiling is likely somewhere between where we are now and where the interest on the debt reaches 50% of federal revenue. Federal revenue in fiscal 2013 was budgeted at $2.9 trillion. 50% of that would be $1.45 trillion. If the average interest on federal debt rises to 5% (a conservative figure, but above what the feds paid during the recession), the debt ceiling in the scenario above would be 29 trillion dollars. Way above the current legal limit.
But if investors lose confidence in the federal government (which they should have by now) and the interest on the debt rose to an average of 10% (admittedly higher than it has been yet), the scenario of the death spiral would occur at $14.5 trillion dollars.
That is right. A death spiral is possible, if enough investors lose confidence, at below the current $16.7 trillion debt limit.
So where the real debt limit lies depends on where real investors, as a group, draw the line.
It would be interesting to ask a few people like Janet Yellen, Ben Bernanke, Lawrence Summers, Barack Obama, Jacob Lew and John Boehner exactly what they think the real debt limit is.
Even the GAO thinks "Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Furthermore, in both the Baseline Extended and Alternative simulations, debt held by the public continues to grow as a share of GDP in the coming decades, indicating that the federal government remains on an unsustainable long-term fiscal path." [GAO Long Term Outlook]
I predict we are in for stormy fiscal weather. Today the government pays interest at a rate from practically zero on short term notes to 3.75% on 30 year bonds. I believe the Federal Reserve has gone to great lengths to keep interest rates low not just because that encourages an economic recovery, but because it puts off the day of reckoning on the real cost of the national debt.
The Republicans are right, we need to cut spending. But we have to cut spending in a way that minimized the hurt to both people and the economy. That means cutting subsidies to the rich, the upper middle class, and in particular military spending and foreign aid. But the Republicans want to cut payments for seniors and the poor.
The Democrats are right, we need more revenue, which means more taxes. We need a higher tax rate on people earning more than $50 million per year and on large inheritances. We need to close every loophole. We need to legalize and tax "street" drugs. But tax increases do result in less spending and less capital deployment, so they should be reasonable. And the Democrats, too, have been reluctant to cut military spending.
The American economy has been badly hurt by both parties and both branches of Congress and by the President these past few years. By protecting their turfs, including the Pentagon budget, they are weakening the long-term viability of the United States.
Both parties should agree to balance the budget in fiscal 2015 and start paying down the national debt in fiscal 2016. The pain will be shared by everyone, but to the extent it can be targeted by law, it should be dished out to those who have benefited most from the American economy.
Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts
Wednesday, October 9, 2013
Friday, May 28, 2010
Picking Up the War Tab
Who will pick up the tab? On the micro scale, everyone has experienced this question, typically at restaurants. In society, when services are given to the poor, the unfortunate, or even those who competently avoid taking responsibility for themselves, either donors pay or taxpayers pay the tab.
Then there is the War. Mostly in Afghanistan these days, but it could flare up any minute in Iraq, Somalia, Iran, Korea, etc. There are direct costs to the occupation of Afghanistan, and then there is the ongoing, bone-crushing cost of maintaining the U.S. military establishment as a whole. There is no doubt that U.S. taxpayers are picking up this tab. But taxpayers are a varied lot, and pay or evade a wide variety of taxes.
Yesterday's vote in the U.S. Senate on special funding for the occupation of Afghanistan illustrates some interesting shifts in the tab-picking-up dynamic. Some Senators in the Democratic Party and some Senators in the Republican Party voted against the funding. The Democratic Party naysayers want a timetable for withdrawal set. The Republican Party Nays had voted against the amendment to attach a withdrawal timetable for the bill. They voted against the bill itself because no provision was made to raise the money for it; it would add to the deficit. So they want the meal, They are worried about who will pay the tab.
American taxpayers have run up an enormous tab. It is called the National Debt. There is interest on the national debt, which itself makes up a big part of the Federal budget each year.
Back when the Dems were the outs and wanted to be voted in, they opposed the war as pointless. Now the leadership of the Dems, including the President, sound exactly like the leadership of the Republicans did just a few years ago. Only the Republicans, given their self-inflating, gun-toting constituency, can't oppose the war openly. There are no votes there. What they can do is point to the way the Democratic Majority is taking out a mortgage on America, at variable interest rates, with no ability to pay if either interest rates go up or the economy cycles back into recessionary mode.
Who will pay the tab? With the Democrats in power, the Republicans are worried that taxes on the "rich" will be raised. After all, you can't squeeze tax dollars out of income-less people living in Obama-villes. The rich already pay a lot of the tax burden, but they also get some pretty good breaks, like not paying taxes on capital gains until the capital is sold, which is typically only when they die. I would rather be rich and pay at higher tax rates, but once you are rich you get used to spending your money like anyone else. Higher taxes for the rich could mean waiting a year before buying a new Bentley, or taking a few days less vacation on the French Riviera, or having to fire one of the maids. That is the kind of irritant that makes rich people put pressure on their politicians.
You know how it goes. "Sure Bob, last year I raised $100,000 for your campaign, but then you raised taxes and now Sally Sue's vacation budget is $250,000 short."
In case you have not noticed, in Democratic majority districts the rich have to pick up two tabs. One is for the presumed winners, the Democrats, and the other is for the Republican Party candidates, to keep their hopes alive and the pressure on the Democrats.
Talk about a quagmire. The Democrats can't get out of Afghanistan without a "victory" because that would make them vulnerable to the Republicans. The Republicans are really, really worried about the future tax burden (and everyone should be), and the smarter ones are beginning to realize that the military part of the military-industrial complex has gotten to big compared to the industrial part. Too much industry has left the U.S.A., leaving a service-based economy that can't pay for the industrial goods we import.
Once I was working as a waiter in a pizza joint and a table of customers ran out on me. The restaurant owner, chewed me out thoroughly, but did not carry out his threat to take the tab out of my miniscule wages. He had to pick up the tab.
When taxes get high, evasion becomes commonplace. Some blame the Greek crisis on that phenomena.
Before dining out, which I seldom due since my wife and I both prefer cooking ourselves, I like to negotiate who is going to pay the tab. I don't like surprise. I especially don't like heavy drinkers who suggest that the tab be split "evenly." The federal deficit and national debt are one big surprise waiting to happen. There is absolutely nothing in our legal codes about who exactly is going to pay that tab.
Then there is the War. Mostly in Afghanistan these days, but it could flare up any minute in Iraq, Somalia, Iran, Korea, etc. There are direct costs to the occupation of Afghanistan, and then there is the ongoing, bone-crushing cost of maintaining the U.S. military establishment as a whole. There is no doubt that U.S. taxpayers are picking up this tab. But taxpayers are a varied lot, and pay or evade a wide variety of taxes.
Yesterday's vote in the U.S. Senate on special funding for the occupation of Afghanistan illustrates some interesting shifts in the tab-picking-up dynamic. Some Senators in the Democratic Party and some Senators in the Republican Party voted against the funding. The Democratic Party naysayers want a timetable for withdrawal set. The Republican Party Nays had voted against the amendment to attach a withdrawal timetable for the bill. They voted against the bill itself because no provision was made to raise the money for it; it would add to the deficit. So they want the meal, They are worried about who will pay the tab.
American taxpayers have run up an enormous tab. It is called the National Debt. There is interest on the national debt, which itself makes up a big part of the Federal budget each year.
Back when the Dems were the outs and wanted to be voted in, they opposed the war as pointless. Now the leadership of the Dems, including the President, sound exactly like the leadership of the Republicans did just a few years ago. Only the Republicans, given their self-inflating, gun-toting constituency, can't oppose the war openly. There are no votes there. What they can do is point to the way the Democratic Majority is taking out a mortgage on America, at variable interest rates, with no ability to pay if either interest rates go up or the economy cycles back into recessionary mode.
Who will pay the tab? With the Democrats in power, the Republicans are worried that taxes on the "rich" will be raised. After all, you can't squeeze tax dollars out of income-less people living in Obama-villes. The rich already pay a lot of the tax burden, but they also get some pretty good breaks, like not paying taxes on capital gains until the capital is sold, which is typically only when they die. I would rather be rich and pay at higher tax rates, but once you are rich you get used to spending your money like anyone else. Higher taxes for the rich could mean waiting a year before buying a new Bentley, or taking a few days less vacation on the French Riviera, or having to fire one of the maids. That is the kind of irritant that makes rich people put pressure on their politicians.
You know how it goes. "Sure Bob, last year I raised $100,000 for your campaign, but then you raised taxes and now Sally Sue's vacation budget is $250,000 short."
In case you have not noticed, in Democratic majority districts the rich have to pick up two tabs. One is for the presumed winners, the Democrats, and the other is for the Republican Party candidates, to keep their hopes alive and the pressure on the Democrats.
Talk about a quagmire. The Democrats can't get out of Afghanistan without a "victory" because that would make them vulnerable to the Republicans. The Republicans are really, really worried about the future tax burden (and everyone should be), and the smarter ones are beginning to realize that the military part of the military-industrial complex has gotten to big compared to the industrial part. Too much industry has left the U.S.A., leaving a service-based economy that can't pay for the industrial goods we import.
Once I was working as a waiter in a pizza joint and a table of customers ran out on me. The restaurant owner, chewed me out thoroughly, but did not carry out his threat to take the tab out of my miniscule wages. He had to pick up the tab.
When taxes get high, evasion becomes commonplace. Some blame the Greek crisis on that phenomena.
Before dining out, which I seldom due since my wife and I both prefer cooking ourselves, I like to negotiate who is going to pay the tab. I don't like surprise. I especially don't like heavy drinkers who suggest that the tab be split "evenly." The federal deficit and national debt are one big surprise waiting to happen. There is absolutely nothing in our legal codes about who exactly is going to pay that tab.
Monday, June 30, 2008
The Federal Reserve May Have a Hidden Agenda
If I had a seat on the Federal Reserve, I would have voted for a quarter-point increase in rates at the latest meeting. I believe that the low federal rates are not being passed along to consumers partly because of inflationary expectations. In other words, low rates are not helping as much as they normally would to get the economy back in growth mode because they are fueling short term inflation and long-term inflationary expectations. They are helping to prop up the idiots who run the nations major banks by allowing them to borrow at low rates and lend at high rates, but a quarter-point increase would not have cut into that game substantially.
A quarter point rise would have had an immediate positive impact on the dollar, which would have the effect of decreasing the contract price of oil, which in turn would reduce gasoline prices and give consumers some cash (or credit) to buy other items.
Gradual quarter point rises would not hurt the housing market or dampen the economy in any way. Four quarter point rises over the course of one year would only raise interest rates to 3%, which is still extremely accommodating.
The bankers who have been given seats on the Fed presumably know all this. Do they want to keep gasoline prices high? Are they willing to sacrifice the economic health of the middle class and working class to achieve an extra quarter-point differential in bank profitability? Well, yes, after all they are bankers. But I think there is another item that has been on the agenda for decades now. The Federal Reserve statements don't mention it, and neither does the financial press, at least not in the context of interest rate decisions.
Interest rates have an large long-term impact on the size of the national debt and the annual payments on that debt. This is not a new problem, but the size of the national debt has reached a magnitude that it impacts the Federal Reserve's leeway to raise rates. This is the real reason rates have been kept consistently too low for the last two decades.
The national debt as I write stands near $9.37 trillion [See debt clock]. Interest paid on it is an average over different time terms for the debt and different points where the debt was auctioned off. However, choose a nice round number like 1%. Over the course of 10 years most of the bonds representing the debt are turned over, so if my hypothesis is that the Fed is keeping rates on average 1% lower than would be ideal for their basic mission (economic expansion with minimal inflation), we are talking about saving the federal government 1% a year on debt. In round numbers, that is $94 billion a year. Over ten years, you can round up to a trillion dollars.
Now look at a truly bad scenario. What if, to fight inflation, the base rate was raised from 2% to 5%? Over ten years we are talking $3 trillion.
What should have happened during the late 1990'2 was the Fed should not have accommodated Congress, the President, and stock market speculators. The Fed is accommodating a federal budget that keeps taxes low on rich people and corporations, but spends a lot of money that mostly goes into corporate coffers. The War on Terror is great for defense contractors, but it is killing the economy. And the terrorists know it.
American Seniors pay for all this in another way. They tend to have their liquid capital in CDs. Low interest rates set by the Fed hurt senior retirement income disproportionately.
The war on terror should be handed over to the CIA and military special operations groups. Having a lot of soldiers on the ground, like we do in Iraq, is an ineffective waste of taxpayer money.
I believe we are in a situation where we can have better long term prosperity by raising interest rates modestly, cutting federal spending modestly - mainly in the Defense budget, and raising taxes modestly. But given the control of the Federal Reserve by the self-serving banking industry and the weakness of the current President and both major party Presidential candidates, I am not using that scenario to model the future.
I am modeling an ever-expanding national debt that will at some point hit a tipping point and turn the United States into a 2nd rate economic and military power. It happened to England after World War II, it happened to the USSR in the 1970s, and it is going to happen here, the only question is when.
Which, by the way, does not mean I'm pessimistic about my stock portfolio. Many individual corporations will survive this calamity, if necessary by basing themselves in countries that run their economies on a more rational basis. Owning companies that have strong intellectual property and management teams is the best economic bet Americans can make right now.
A quarter point rise would have had an immediate positive impact on the dollar, which would have the effect of decreasing the contract price of oil, which in turn would reduce gasoline prices and give consumers some cash (or credit) to buy other items.
Gradual quarter point rises would not hurt the housing market or dampen the economy in any way. Four quarter point rises over the course of one year would only raise interest rates to 3%, which is still extremely accommodating.
The bankers who have been given seats on the Fed presumably know all this. Do they want to keep gasoline prices high? Are they willing to sacrifice the economic health of the middle class and working class to achieve an extra quarter-point differential in bank profitability? Well, yes, after all they are bankers. But I think there is another item that has been on the agenda for decades now. The Federal Reserve statements don't mention it, and neither does the financial press, at least not in the context of interest rate decisions.
Interest rates have an large long-term impact on the size of the national debt and the annual payments on that debt. This is not a new problem, but the size of the national debt has reached a magnitude that it impacts the Federal Reserve's leeway to raise rates. This is the real reason rates have been kept consistently too low for the last two decades.
The national debt as I write stands near $9.37 trillion [See debt clock]. Interest paid on it is an average over different time terms for the debt and different points where the debt was auctioned off. However, choose a nice round number like 1%. Over the course of 10 years most of the bonds representing the debt are turned over, so if my hypothesis is that the Fed is keeping rates on average 1% lower than would be ideal for their basic mission (economic expansion with minimal inflation), we are talking about saving the federal government 1% a year on debt. In round numbers, that is $94 billion a year. Over ten years, you can round up to a trillion dollars.
Now look at a truly bad scenario. What if, to fight inflation, the base rate was raised from 2% to 5%? Over ten years we are talking $3 trillion.
What should have happened during the late 1990'2 was the Fed should not have accommodated Congress, the President, and stock market speculators. The Fed is accommodating a federal budget that keeps taxes low on rich people and corporations, but spends a lot of money that mostly goes into corporate coffers. The War on Terror is great for defense contractors, but it is killing the economy. And the terrorists know it.
American Seniors pay for all this in another way. They tend to have their liquid capital in CDs. Low interest rates set by the Fed hurt senior retirement income disproportionately.
The war on terror should be handed over to the CIA and military special operations groups. Having a lot of soldiers on the ground, like we do in Iraq, is an ineffective waste of taxpayer money.
I believe we are in a situation where we can have better long term prosperity by raising interest rates modestly, cutting federal spending modestly - mainly in the Defense budget, and raising taxes modestly. But given the control of the Federal Reserve by the self-serving banking industry and the weakness of the current President and both major party Presidential candidates, I am not using that scenario to model the future.
I am modeling an ever-expanding national debt that will at some point hit a tipping point and turn the United States into a 2nd rate economic and military power. It happened to England after World War II, it happened to the USSR in the 1970s, and it is going to happen here, the only question is when.
Which, by the way, does not mean I'm pessimistic about my stock portfolio. Many individual corporations will survive this calamity, if necessary by basing themselves in countries that run their economies on a more rational basis. Owning companies that have strong intellectual property and management teams is the best economic bet Americans can make right now.
Monday, June 9, 2008
One Million Opportunities
Last week the headlines screamed that the number of homes foreclosures had passed the million mark [See, for instance, Homes in Foreclosure Top One Million at CNN/Money]
Some see a train wreck the size of the global economy. Smarter people see one million opportunities.
We all know the story of how the opportunities were created. Housing prices started going up after the Internet Stock crash of 2001 because the Federal Reserve set interest rates too low and left them their too long. Stupid people were egged on my news media, real-estate agents (my friend John calls them land pimps), banks and mortgage companies, friends and relatives to believe that housing prices would always go up at 10 to 20% per year. A house was no longer just a place to live in, it was a money machine. Why, it was such a sure thing you could buy a house without a down and be rich in almost no time.
I've seen smarter people who believe a carpenter can raise the dead.
Some people worked and saved and did not fall for the flim-flam. Now they have downs and if they can buy a house at the right price they can eliminate their rental expense. They can build equity the old fashioned, reliable way: by spending less than they make and paying down the mortgage.
It is a good thing. The profligate are punished and the thrifty rewarded.
Not every house in foreclosure is a good buy. You have to ask yourself, what is the real value of this house, and how does that compare to the asking price? Just like stocks. I always ask myself, before buying or selling a stock, what is the market capitalization of the company, and if I were going to buy the whole company, would that be a price I like?
Not everyone should buy a house just because the price is right. It takes energy or money, and sometimes both, to keep up a house. Things go wrong, things wear out. Taxes have to be paid, and they will eat up the original purchase price of the house in the long run. Don't kid yourself, all land in the U.S. is just rented from the government, and taxes are the rental payments.
And people are out there hunting and buying. April used home figures were released today [See April Pending Home Sales Rise As Prices Tumble] and they reflect what I've been hearing anecdotally in California. If a home is for sale and it is priced right, it can sell quickly. People who are trying to sell for imaginary prices, their properties will just sit.
There are scenarios that could make buying homes now look stupid, but they are becoming increasingly unlikely. Buy a home at the right price and ugly scenarios are balanced by some pretty bright ones. Some distressed sellers may sell so cheap that a non-distressed seller to have some equity, aside from a down, pretty quickly.
Most in demand: homes near workplaces or on public transportation routes.
Some see a train wreck the size of the global economy. Smarter people see one million opportunities.
We all know the story of how the opportunities were created. Housing prices started going up after the Internet Stock crash of 2001 because the Federal Reserve set interest rates too low and left them their too long. Stupid people were egged on my news media, real-estate agents (my friend John calls them land pimps), banks and mortgage companies, friends and relatives to believe that housing prices would always go up at 10 to 20% per year. A house was no longer just a place to live in, it was a money machine. Why, it was such a sure thing you could buy a house without a down and be rich in almost no time.
I've seen smarter people who believe a carpenter can raise the dead.
Some people worked and saved and did not fall for the flim-flam. Now they have downs and if they can buy a house at the right price they can eliminate their rental expense. They can build equity the old fashioned, reliable way: by spending less than they make and paying down the mortgage.
It is a good thing. The profligate are punished and the thrifty rewarded.
Not every house in foreclosure is a good buy. You have to ask yourself, what is the real value of this house, and how does that compare to the asking price? Just like stocks. I always ask myself, before buying or selling a stock, what is the market capitalization of the company, and if I were going to buy the whole company, would that be a price I like?
Not everyone should buy a house just because the price is right. It takes energy or money, and sometimes both, to keep up a house. Things go wrong, things wear out. Taxes have to be paid, and they will eat up the original purchase price of the house in the long run. Don't kid yourself, all land in the U.S. is just rented from the government, and taxes are the rental payments.
And people are out there hunting and buying. April used home figures were released today [See April Pending Home Sales Rise As Prices Tumble] and they reflect what I've been hearing anecdotally in California. If a home is for sale and it is priced right, it can sell quickly. People who are trying to sell for imaginary prices, their properties will just sit.
There are scenarios that could make buying homes now look stupid, but they are becoming increasingly unlikely. Buy a home at the right price and ugly scenarios are balanced by some pretty bright ones. Some distressed sellers may sell so cheap that a non-distressed seller to have some equity, aside from a down, pretty quickly.
Most in demand: homes near workplaces or on public transportation routes.
Monday, March 24, 2008
Can the Federal Government Avoid Bankruptcy?
The ultimate economic catastrophe for citizens of the United States of America would be a default by the Federal government. As far as I know, the government of the U.S. has never defaulted, not even during the Great Depression. Scenarios leading to default are unlikely. However, given the current situation I think we should consider the possibility in a serious manner, if only to avoid the eventuality.
The federal government is deeply in debt. Despite a fair degree of economic growth from 2002 until 2007, the debt expanded rapidly during this period. As of today the debt clock puts that debt at about $9.4 trillion (That is 9.4 thousand billions. Billions are thousand millions). That is about $31,000 per person living in the United States.
Instead of increasing taxes (or decreasing expenses) this year to get the budget in balance, Congress in its election year desire to get re-elected decided to send every adult taxpayer in the U.S. a $600 refund, plus some more dough for child dependents.
Now the really scary part. This is going according to plan. Only the plan was made by Osama Bin Laden. It might seem ludicrous that a 2 bit terrorist made up a plan in the 1990's that could make the U.S. default on its debt at some point in the future, so before I detail that story we should look at what it takes to make a national government go bankrupt. Because national governments have gone bankrupt in the past, and it could happen here.
Suppose the U.S. continues to run up debt, only interest rates on the debt rise. They would rise if confidence were shaken enough. Suppose they rise to a scary (but not unprecedented) level, say 10%. Suddenly the government would need a trillion a year just to cover interest.
Now suppose that at the same time the economy tanked. We'll call a 25% tank extremely serious, but not impossible. In fiscal 2007 the federal government collected $2.4 billion in revenue. Reduce that by 25% and you have $1.8 billion. So, in our doomsday 10% interest with 25% revenue reduction scenario, if the budget were balanced and the interest were paid only $0.8 billion would be left for everything else, from the Pentagon to federal earmarked projects that use tax dollars to buy votes for incumbent congressmen.
But federal policy since FDR is to spend, spend, spend the nation out of recessions and depressions, because otherwise a political party's goose would be as cooked as Herbert Hoover. Since taxes would not be raised, the money would have to be borrowed. At 10% interest. In a year or two the full faith and credit of the U.S. government would be finished. Kaput. Zero.
Wait a minute, did I not say the feds did not default even during the Great Depression? That's right, but then was then and now is different. The Federal Government entered the Great Depression almost debt free (most of its debt in 1929 was from World War I expenses).
Any way, at that (currently imaginary) point something has to give, and all options are bad. Raising taxes would hurt the economy, although it might restore investor confidence in U.S. bonds. The Fed could print money, and that might not even cause very much inflation in a depression economy, but it might just give the country depression plus inflation, as happened in Germany after World War II and to a lesser extent in the U.S. after the Vietnam War ended. At some point Congress will have to choose between defaulting on bonds, raising taxes, and cutting domestic and military spending to the bone.
And Al-Qaeda wins. Cutting back military spending means that the U.S. global military empire falls apart. Keeping up military spending would mean defaulting on bonds, and the U.S. global economic empire would collapse. Raising taxes would be the least best option for Al-Qaeda, but would make Americans really angry and could kill what was left of the economy. Al-Qaeda wins.
So let's just review how Al-Qaeda sees the world. Islamic militant fanaticism is not something new. What is new is that these guys can read more than the Koran. After the army of the U.S.S.R. withdrew from Afghanistan (where it had supported a secular, non-Islamic government) Western analysts said the real cause was economic. Not that Osama and crew were not fierce fighters, or that the advanced technologies the CIA equipped them with weren't a bother for the Soviet army. When the Soviet Union later collapsed, its emphasis on military rather than consumer spending was given (by Western analysts) as a leading cause.
So the guys at Al-Qaeda, enjoying war and wanting an excuse to continue their lifestyles, picked a new enemy. But they re-used the plan from the prior war, because it worked.
They wanted the U.S. out of Saudi Arabia. They wanted the U.S. to stop backing the governments of Egypt, Pakistan and Israel. They were aware that the U.S. economy was far larger than the Soviet one. So if the Afghanistan war took years to win, the War Against the Christian Imperialist Dogs (what we call the War on Terror) might take a couple of decades to win. And it did not require them to conquer the U.S. Just as they did not conquer the Soviet Union.
All they needed to do was bankrupt the U.S.
Which is what has been happening with the U.S. wars against Afghanistan and Iraq.
Al-qaeda has no better friend than George W. Bush. He decreased taxes and greatly increased military spending. The very things that could still lead, eventually, to a default on U.S. government issued bonds.
America's long-term economic and military strength depend on keeping the federal debt at a manageable level. And while many variables go into that equation, the most important thing to restore confidence in the economy is to get the U.S. military out of Iraq and Afghanistan ASAP.
The federal government is deeply in debt. Despite a fair degree of economic growth from 2002 until 2007, the debt expanded rapidly during this period. As of today the debt clock puts that debt at about $9.4 trillion (That is 9.4 thousand billions. Billions are thousand millions). That is about $31,000 per person living in the United States.
Instead of increasing taxes (or decreasing expenses) this year to get the budget in balance, Congress in its election year desire to get re-elected decided to send every adult taxpayer in the U.S. a $600 refund, plus some more dough for child dependents.
Now the really scary part. This is going according to plan. Only the plan was made by Osama Bin Laden. It might seem ludicrous that a 2 bit terrorist made up a plan in the 1990's that could make the U.S. default on its debt at some point in the future, so before I detail that story we should look at what it takes to make a national government go bankrupt. Because national governments have gone bankrupt in the past, and it could happen here.
Suppose the U.S. continues to run up debt, only interest rates on the debt rise. They would rise if confidence were shaken enough. Suppose they rise to a scary (but not unprecedented) level, say 10%. Suddenly the government would need a trillion a year just to cover interest.
Now suppose that at the same time the economy tanked. We'll call a 25% tank extremely serious, but not impossible. In fiscal 2007 the federal government collected $2.4 billion in revenue. Reduce that by 25% and you have $1.8 billion. So, in our doomsday 10% interest with 25% revenue reduction scenario, if the budget were balanced and the interest were paid only $0.8 billion would be left for everything else, from the Pentagon to federal earmarked projects that use tax dollars to buy votes for incumbent congressmen.
But federal policy since FDR is to spend, spend, spend the nation out of recessions and depressions, because otherwise a political party's goose would be as cooked as Herbert Hoover. Since taxes would not be raised, the money would have to be borrowed. At 10% interest. In a year or two the full faith and credit of the U.S. government would be finished. Kaput. Zero.
Wait a minute, did I not say the feds did not default even during the Great Depression? That's right, but then was then and now is different. The Federal Government entered the Great Depression almost debt free (most of its debt in 1929 was from World War I expenses).
Any way, at that (currently imaginary) point something has to give, and all options are bad. Raising taxes would hurt the economy, although it might restore investor confidence in U.S. bonds. The Fed could print money, and that might not even cause very much inflation in a depression economy, but it might just give the country depression plus inflation, as happened in Germany after World War II and to a lesser extent in the U.S. after the Vietnam War ended. At some point Congress will have to choose between defaulting on bonds, raising taxes, and cutting domestic and military spending to the bone.
And Al-Qaeda wins. Cutting back military spending means that the U.S. global military empire falls apart. Keeping up military spending would mean defaulting on bonds, and the U.S. global economic empire would collapse. Raising taxes would be the least best option for Al-Qaeda, but would make Americans really angry and could kill what was left of the economy. Al-Qaeda wins.
So let's just review how Al-Qaeda sees the world. Islamic militant fanaticism is not something new. What is new is that these guys can read more than the Koran. After the army of the U.S.S.R. withdrew from Afghanistan (where it had supported a secular, non-Islamic government) Western analysts said the real cause was economic. Not that Osama and crew were not fierce fighters, or that the advanced technologies the CIA equipped them with weren't a bother for the Soviet army. When the Soviet Union later collapsed, its emphasis on military rather than consumer spending was given (by Western analysts) as a leading cause.
So the guys at Al-Qaeda, enjoying war and wanting an excuse to continue their lifestyles, picked a new enemy. But they re-used the plan from the prior war, because it worked.
They wanted the U.S. out of Saudi Arabia. They wanted the U.S. to stop backing the governments of Egypt, Pakistan and Israel. They were aware that the U.S. economy was far larger than the Soviet one. So if the Afghanistan war took years to win, the War Against the Christian Imperialist Dogs (what we call the War on Terror) might take a couple of decades to win. And it did not require them to conquer the U.S. Just as they did not conquer the Soviet Union.
All they needed to do was bankrupt the U.S.
Which is what has been happening with the U.S. wars against Afghanistan and Iraq.
Al-qaeda has no better friend than George W. Bush. He decreased taxes and greatly increased military spending. The very things that could still lead, eventually, to a default on U.S. government issued bonds.
America's long-term economic and military strength depend on keeping the federal debt at a manageable level. And while many variables go into that equation, the most important thing to restore confidence in the economy is to get the U.S. military out of Iraq and Afghanistan ASAP.
Saturday, December 22, 2007
2007 Wrap Up
This month and the first half of January 2008 I am working on a project for Microsoft; I have not had time to write blogs, though a lot of interesting things have happened with the stocks I cover. So here's a quick summary of 2007, recent events, and my thoughts on 2008 before I dive back into Windows Server 2008.
2007 was a good year for me, but not for my stock portfolio. Fortunately I resisted the temptation to try to flip houses in 2005-2006, which would have left me bankrupt. Instead I paid down my mortgage, which guarantees me about 5.5% in long term savings. So while my residence has declined in auction value, there is still a lot of net worth in it. I live in California, I've seen a couple of downturns, and as they say, you can't make new real estate near the ocean. So I'm not worried. My apple trees brought in a good crop this year, and that is a good metaphor for how I think about investing. I planted the first ones 9 years ago and now just about all I have to do is water them 4 times each summer and I get top-quality organic apples to eat or trade. The best investments may require a long time frame.
My portfolio is another matter. It was an evil year for me; I did worse than the market. There were two major killers: AMD and Marvell (MRVL).
AMD had just introduced Opterons when I made my initial investment. It looked like an Intel killer for a while. Then it bought ATI at the same time Intel tried to crush it with a price war, resulting in a string of net losses. In 2007 the quad-core Barcellona Opterons were supposed to save the day, but they never came. Now AMD says Q1 2008; we'll see. On the other hand the law suit against Intel is probably worth more than AMD's entire market capitalization today. But lawyers, judges and juries are a tricky thing. Intel was caught red handed, but will hide behind their lawyers as long as they can.
Marvell has been a profitless wonder story, which is alright with me. In 2006 they acquired Intel's mobile processor division. The costs from that and heavy investment in research has meant GAAP (and even some non-GAAP) net losses. But revenues have climbed rapidly, and Marvell management says revenues will continue to climb in 2008, but promises to hold research costs steady. Today's bargain stock price will seem cheap if management delivers on that promise. If they screw up, or if the macroeconomic picture gets worse, then the price could fall further.
The massive stupidity of both lenders and real estate investors is creating turmoil that can benefit those who were more conservative and have cash to spend. Most (but not all) stocks are cheap right now. Real estate varies by geographic area; I would not call it cheap, but low ball a house you like and chances are the owner will bargain with you. The global economy is strong with a few weak spots, but that it as usual. Agriculture is strong; land prices in Iowa and other grain-production area are actually rising. Note that sovereign investment funds are jumping in to use cash to buy U.S. assets. They may make some mistakes, but I think foreign investors will see the value in U.S. assets (stocks, bonds, and real estate) first because the dollar is weak and they can be less emotional from a distance.
The main economic problem for the U.S. is the Republican Party's "No New Taxes" pledge. It has been good for partisan politics, but bad for the nation's economy. There is still plenty of government waste, and imperialistic adventures are bleeding the U.S. dry. But mainly low taxes are the cause of the deficit. Pay now or pay more later is a rule for taxpayers. Say half the Bush tax cuts for the wealthy were eliminated. Couldn't the billionaires live with that? They'd still be paying lower tax rates than at any time since World War II, but the deficit could be eliminated and there might even be some money for infrastructure that is not Congressionally earmarked crud.
One last note: Celgene (CELG). Boy, did I think I was smart to buy this company earlier this year. Then they announced an expensive merger. Okay, I could live with that. Recently there has been speculation that a rival will cut into their Revlimid franchise. Ouch! I can't decide whether to buy more stock because it is cheap or to be cautious here.
My best stock in 2007: Microsoft (MSFT). Despite all the mud slung at it, it does a number of things way better than any of its competitors. Internet bandwidths are just not sufficient to allow serious office productivity to run on the Internet. After years of Google hype, when you look at Google numbers, all its revenues come from ad sales. That is great, it is a great, profitable, and useful company (this blog is run on Google). But it is little or no threat to Microsoft's core business, or Adobe's for that matter. Modern PCs are supercomputers; those who know how to use this amazing tool can run circles around those who use them as glorified typewriters.
2007 was a good year for me, but not for my stock portfolio. Fortunately I resisted the temptation to try to flip houses in 2005-2006, which would have left me bankrupt. Instead I paid down my mortgage, which guarantees me about 5.5% in long term savings. So while my residence has declined in auction value, there is still a lot of net worth in it. I live in California, I've seen a couple of downturns, and as they say, you can't make new real estate near the ocean. So I'm not worried. My apple trees brought in a good crop this year, and that is a good metaphor for how I think about investing. I planted the first ones 9 years ago and now just about all I have to do is water them 4 times each summer and I get top-quality organic apples to eat or trade. The best investments may require a long time frame.
My portfolio is another matter. It was an evil year for me; I did worse than the market. There were two major killers: AMD and Marvell (MRVL).
AMD had just introduced Opterons when I made my initial investment. It looked like an Intel killer for a while. Then it bought ATI at the same time Intel tried to crush it with a price war, resulting in a string of net losses. In 2007 the quad-core Barcellona Opterons were supposed to save the day, but they never came. Now AMD says Q1 2008; we'll see. On the other hand the law suit against Intel is probably worth more than AMD's entire market capitalization today. But lawyers, judges and juries are a tricky thing. Intel was caught red handed, but will hide behind their lawyers as long as they can.
Marvell has been a profitless wonder story, which is alright with me. In 2006 they acquired Intel's mobile processor division. The costs from that and heavy investment in research has meant GAAP (and even some non-GAAP) net losses. But revenues have climbed rapidly, and Marvell management says revenues will continue to climb in 2008, but promises to hold research costs steady. Today's bargain stock price will seem cheap if management delivers on that promise. If they screw up, or if the macroeconomic picture gets worse, then the price could fall further.
The massive stupidity of both lenders and real estate investors is creating turmoil that can benefit those who were more conservative and have cash to spend. Most (but not all) stocks are cheap right now. Real estate varies by geographic area; I would not call it cheap, but low ball a house you like and chances are the owner will bargain with you. The global economy is strong with a few weak spots, but that it as usual. Agriculture is strong; land prices in Iowa and other grain-production area are actually rising. Note that sovereign investment funds are jumping in to use cash to buy U.S. assets. They may make some mistakes, but I think foreign investors will see the value in U.S. assets (stocks, bonds, and real estate) first because the dollar is weak and they can be less emotional from a distance.
The main economic problem for the U.S. is the Republican Party's "No New Taxes" pledge. It has been good for partisan politics, but bad for the nation's economy. There is still plenty of government waste, and imperialistic adventures are bleeding the U.S. dry. But mainly low taxes are the cause of the deficit. Pay now or pay more later is a rule for taxpayers. Say half the Bush tax cuts for the wealthy were eliminated. Couldn't the billionaires live with that? They'd still be paying lower tax rates than at any time since World War II, but the deficit could be eliminated and there might even be some money for infrastructure that is not Congressionally earmarked crud.
One last note: Celgene (CELG). Boy, did I think I was smart to buy this company earlier this year. Then they announced an expensive merger. Okay, I could live with that. Recently there has been speculation that a rival will cut into their Revlimid franchise. Ouch! I can't decide whether to buy more stock because it is cheap or to be cautious here.
My best stock in 2007: Microsoft (MSFT). Despite all the mud slung at it, it does a number of things way better than any of its competitors. Internet bandwidths are just not sufficient to allow serious office productivity to run on the Internet. After years of Google hype, when you look at Google numbers, all its revenues come from ad sales. That is great, it is a great, profitable, and useful company (this blog is run on Google). But it is little or no threat to Microsoft's core business, or Adobe's for that matter. Modern PCs are supercomputers; those who know how to use this amazing tool can run circles around those who use them as glorified typewriters.
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