December 31, 2008
Tales of government bureaucracy, from the Daily News:
Property-tax bills, which were sent out over the last week and are due Jan. 30, will increase by 7 percent, to raise nearly $600 million.
The spike will be offset by the $400 rebates that were mailed Friday, Bloomberg said.
Out of context, it seems a little redundant, doesn’t it. Actually, the rebate was approved way before the tax increase was even suggested. And every politician who every expects to win another election knows you can not take money back after it has already been promised. The story though, makes for a curious juxtaposition.
December 31, 2008
In earlier an Bailout post, I commented that it seemed that people were not taking advantage of government mortgage restructuring programs because they were waiting for something better. Following up on this topics is this quote from the New York Times article, Breaking Up Is Harder To Do After Housing Fall.
“Most of the lenders around here are in complete disarray,” Mr. Hennenhoefer said. “They’re not as aggressive about evictions. Everyone’s hanging around in properties hoping the government will buy all that bad paper and then they’ll negotiate a new deal with the government. They just live in different parts of the house and say, ‘We’ll stay here for as long as we can, and save our money, so we have the ability to move when and if the sheriff comes to toss us out.’ ”
This quite would seem to bear the idea out. What happens though when everyone stops paying? What if there are no further bailouts?
December 31, 2008
This is a great post on Funding the Deficit from Across the Curve, with some great comments.
The author opines:
I think that the Treasury will be hard pressed to raise that amount of money without some novel financing ideas.
In addition to a new 7 year note, and monthly 30 year bonds, one suggestion:
I think that the Treasury should take advantage of the current rate structure and should issue a chunk of 50 year bonds. Issuing these bonds at any rate below 4 percent seems like a steal to me. These are unusual times and Treasury should consider this unusual and unique funding approach.
December 29, 2008
Another post on the nexus between US Debt, interest rates, and the value of the US Dollar, this time from an interview with Stephanie Pomboy, President of MacroMavens, in Barron’s.
On the topic of a decline in the buying of US Treasury debt by foreigners:
We are acting as though there are no consequences to basically running the money off the printing press and handing it to the Federal government to backstop financial markets or bail out homeowners or what not. There is no consequence to doing this, unless or until the rest of the world says to us, ‘We don’t like this game’ and ‘We don’t want to have all the dollar claims we are holding debased by [Fed Chairman Ben Bernanke] running his printing press.’
In response to the next question in the interview:
I’ve always had a very simplistic view about this: Either we are going to pay for our policy sins via higher interest rates or a weaker dollar. And for an economy that is as levered as the one in the U.S. is, the former choice is not an option. We can’t pay through higher interest rates; we barely got to 4.5%, 5% before the whole subprime crisis erupted. So a weaker dollar is the natural valve. But right now, we are enjoying some real competition in the ugly contest from the currencies of the European Union and the United Kingdom, and that will probably persist for a while because they are in pretty bad shape, and they are a little bit behind the curve relative to us.
If we rely on foreign creditors to lend us the money to sustain our lifestyles — and that’s what we do — we need to compensate them for that risk of lending to us. As the economy weakens and our credit quality should theoretically be deteriorating, the only way we can really attract that same capital is by offering a higher interest rate or making our assets cheaper to them, in this case by having our currency be weaker.
December 29, 2008
Following up on The Dollar post from earlier, from Bloomberg: Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says. Mikuni being Akio Mikuni, the president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said.
“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today.
It’s an interesting (and short) article.
While it many have suggested that increasing the money supply through monetary policy and deficit fiscal spending can spur growth in the economy, it begs the question, how much debt can the United States Government maintain before it loses control of interest rates or the currency?
December 29, 2008
This article, from Asia News, has some interesting data points on US government debt (U.S. Debt Approaches Insolvency; Chinese Currency Reserves At Risk). Although I am not so sure on the source that is providing the predictions and, as with all predictions/forecasts/palm readings, you should take it only for what you feel it is worth. The factual information, however, is nicely footnoted.
In 2007, public debt in the United States was 10.6 trillion dollars, compared to a GDP of 13.811 trillion dollars. Public debt in 2007 was therefore 76.75% of GDP. In just one year, direct and indirect public debt have grown to more than 100% of GDP, reaching 176.9%. These percentages exclude the debt guaranteed by policies underwritten by AIG, also nationalized, and liabilities for health spending (Medicaid and Medicare) and pensions (Social Security).
By way of comparison, the Maastricht accords require member states of the European Union (EU) to reduce their public debt to no more than 60% of GDP. Again by way of comparison, in one of the EU countries with the largest public debt, Italy, public debt in 2007 was equal to 104% of GDP.
Also of note:
In 2007, 61.8% of America’s public debt was held by foreign investors, most of them Asian. So the U.S. public debt held by nonresident foreigners is equal to about 109.3% of GDP.
As with all predictions, take it for what you think it is worth:
In the early months of next year, when the official data are published, the United States will run a serious risk of insolvency. This would involve, in the first place, a valuation crisis for the dollar. A crisis in U.S. public debt would likely have a severe impact on the Asian countries that are the main exporters to the United States, China first among them. In a currency crisis, China risks losing much of the value of its accumulated currency reserves.
This does not even include any planned fiscal stimulus packages relying on deficit spending set to be introduced next year.
December 28, 2008
Already in a tough position brought on by the loss of Wall Street income, and the associated tax revenues, this story on the city pension funds, from the NY Post (City Pension Nightmare) brings more bad news. Apparently the city’s five pension funds have lost close to 30% this year.
This is a scary situation. The losses are so big it could overwhelm the city,” said John Murphy, former executive director of the New York City Employee Retirement System, the largest pension fund.
The most troubling part, however, is the laws governing the funding of the pensions.
By law, the city must make up the difference when the pension funds earn less than 8 percent a year. The city can spread the cost of plugging that gap over the following six years.
Wilth the losses reaching into the billions, it will be interesting to see how the city will be able to provide the additional funding with an already extremely tight budget, even with spreading those funding requirements over six years.
New Jersey, on the other hand, is allowing municipalities to skip required payments to their pension plans next year, according to the New York Times.
Update: Althought this is New York State, it does appear that some politicians are looking for changing pension schemes in order to reduce the present financial liabilities, New York Plans Sweeping Pension Reforms.