I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

He generally warned us that

The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.

Do you believe the curent regime has any political courage, let alone sufficient to change course?

Today, Bloomberg News makes a very strong and creatively presented case for deflation. We now have some serious validation….but no joy.

• Extrmely low probability
• Extremely high impact
• Unimaginable a priori

Given this BSE, we have had a massive “pivot” from the health care fiasco in the making to focus on USA economy and jobs. The reason for this change is simply the one new Republican vote that can stop disastrous congressional economic policies.

OK, so how can this BSE save us? Bear with us for a bit.

We recently came upon this quote and find it quite descriptive:

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy…”

by Alexander Fraser Tytler, Scottish lawyer and writer, 1770.

Now, consider this fact:

~50% of USA workers pay $0 taxes, while the rest of the workers (the “rich”) pay all the taxes.

We think it fair to conclude:

Half the population has incentive to free-ride on the others and will cheerfully vote for increasing burdens on those “rich”.

Our country is in peril from financial catastrophes and very poor political decisions. Most pertinently, the Scott Brown BSE may enable the inevitable lunge by Democrats for more taxation and thus massive class warfare to be avoided.

“Investing and speculating are widely confused. Investing is “to allocate capital into productive activities with the anticipation of operating profit.” Speculation is “to allocate capital in order to profit from politically caused distortions in the market place.”

If you can think of any counter-examples, please let us know!

She says

The Fed’s asymmetrical thinking extends as well to its treatment of financial assets—such as equity and debt instruments—en route to a bubble. As prices surge and markets soar, the Fed is reluctant to raise interest rates lest it be accused of hindering growth. But when the bubble bursts and asset prices begin to tumble, the Fed quickly steps in with dramatic interest rate reductions to “restore investor confidence” in hopes of avoiding a meltdown.

and concludes with

Now here’s the scary part: Even though more than half of all American households now own equities directly or through mutual funds, an increase in equity prices does not figure into the Fed’s calculation of inflation. So while measures of core inflation (which exclude food and energy) carefully register minute gains in the price of a fixed basket of goods and services meant to reflect what a typical family buys to achieve a minimum standard of living, they ignore massive price surges in what has effectively become a widely held consumer good: stocks.

Read the full article here

Want to hear a real laugher? Despite the current disharmony in politics, there’s one policy on which all of Washington agrees. Republicans and Democrats, House and Senate, president and Congress all agree that after last fall’s financial crisis, the federal government has to regulate the financial industry more closely to protect our economy from risk of systemic financial collapse.

Here’s the joke. As boom- and bust-prone as high finance always has been and remains, the greatest systemic risk to our economy is not Wall Street. It’s the growing federal debt (and weakening dollar) being enacted by those Washington politicians — the ones who want to protect us from Wall Street.

The piece was written by Tony Blankley and you can read it here.

Our financial situation is breathtakingly unsustainable. You really need to pay attention to preserve and grow your capital.

]]> http://www.rocketcap.com/the-largest-systemic-risk-to-usa-economy-our-federal-debt/feed/ 0 http://www.rocketcap.com/defeat-the-debt/ http://www.rocketcap.com/defeat-the-debt/#comments Wed, 07 Oct 2009 00:00:32 +0000 admin http://www.rocketcap.com/?p=1629 A truly excellent web site that focuses on our national debt and how to reduce it is this one:

www.defeatthedebt.com

{ See our last post on Medicare dwarfing all other economic problems }

Let’s take a look at the over-arching debt and obligations owed by the US. We can get get a meaningful overview from the few numbers below.

US Assets and Obligations

The source for these numbers is the US Treasury and National Center for Policy Analysis (NCPA). They were conveniently pulled together here. The last line in the table is taken from our post above, and the source is Kent Smetters, Wharton School insurance and risk management professor.

Let’s get some perspective. According to the US Treasury, the average interest rate paid by Treasury is 3.36%/YR. Thus, the interest paid on the debt is about $400B/YR, which is a fraction of the annual revenues to the Treasury. On the other hand, if we applied the entire revenue stream to the US government to interest, we could pay down only $2.2T/.036=$65.5T . Thus, the enormity of the amounts of debt and obligation are loosely bounded.

Even more striking: if the US literally sold itself for the amount estimated by Prof. Smetters, the revenue still would be dwarfed by the outstanding obligations. The US cannot even hope for a hostile takeover to save itself!

So what will the end game from this situation be? Here are the possibilities, as summarized by Sprott, and the very likely outcomes:

• Default on Medicare promises. (Unlikely given the current debate in Washington to expand medical coverage.)
• Default on Social Security promises. (Unlikely given the increasing average age of the voting public.)
• Put forward a credible plan to balance the budget. (Unlikely given the most recent budget projections.)
• Default on outstanding debt. (Unthinkable)

The only remaining solution is to inflate the obligations and debt. QED.

Almost every page of the health care bill HR3200 from the House of Representatives has at least one statement that can alter your life. When those 1017 pages interact, they will produce effects not imagined by the bureaucrats and politicians who wrote this thing. The odds those unpredictable Black Swans are good for you are nil. They will hurt you.

As an example, consider this from the New York Times of 1 OCT 09 in regard to the current Medicare:

Medicare is putting in place a new policy that may sharply curtail the use of the cancer drug Avastin as a treatment for eye diseases.

But the way the bureaucratic gears mesh in this case, the move could end up costing Medicare itself hundreds of millions of dollars a year, and individual patients thousands of dollars.

What happened is that Medicare added a new reimbursement category for doctors to use for very small doses of an existing expensive drug. As the Times writes:

But Medicare has now introduced a special reimbursement code just for the smaller doses of Avastin. And starting Thursday, the reimbursement of Avastin dropped to about $7.20 for the dose typically used in the eye.

That would mean eye doctors — who purchase Avastin and then are reimbursed when using it on patients — would lose money administering the drug.

The new policy would give eye doctors a financial incentive to switch to Lucentis, for which they would be fully reimbursed even though that drug is significantly more expensive.

If doctors do shift to Lucentis, “this will have a huge economic impact on Medicare, in the range of hundreds of millions of dollars,” said Dr. David W. Parke II, chief executive of the American Academy of Ophthalmology. “Members view this as a bureaucratic decision that is maybe necessary, based on statutes, but highly short-sighted.”

This illustrates the obscenity the Congress is creating by rushing to a new, vast bureaucratic system with enormous perverse incentives and deep complexities that can only make life worse for everyone.

Read Full Article

Domestic discretionary spending amounted to $485 billion last year. With a deficit last year of $459 billion, we would have had to abolish virtually every single domestic program to have achieved budget balance. That means every penny spent on housing, education, agriculture, highway construction and maintenance, border patrols, air traffic control, the FBI, and every other thing one can think of outside of national defense, Social Security and Medicare.

This means that it is impossible to get control of spending without cutting entitlement programs. Many Republicans agree, but they never make any serious effort to do so. On the contrary, they defend entitlements when Democrats suggest cutting them. The Republican National Committee has run television ads opposing cuts in Medicare because Obama proposed using such cuts to fund health reform. Many demonstrators at right-wing tea parties were seen carrying signs demanding that the government keep its hands off Medicare.

This reality is actually old and well-known. But it’s wise to review this stark fact from time to time if you care about your long term financial future and appreciate the enormous impact in our economy by the federal government.