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America Is A Bankrupt, Mickey-Mouse Economy

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http://www.cnbc.com/id/38654017

America Is 'Bankrupt Mickey Mouse Economy': CIO

Published: Wednesday, 11 Aug 2010 | 7:09 AM ET

By: Patrick Allen

CNBC Senior News Editor

America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.

"America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC.

The comments followed news that the Fed was extending its quantitative easing program following what the Federal Open Market Committee (FOMC) described as a fall in the pace of growth in output and employment.

The Fed has spent the past three years on a route of aggressive rate cuts and purchases of trillions in various securities but it is running out of measures it can take, Pimco's co-CEO Mohamed El-Erian told CNBC.

Wermuth is a fund manager heavily invested in Russia and says if the same International Monetary Fund (IMF) team that managed the financial crisis in the former super power in 1998 now turned up at the US Treasury, they would withdraw support for current US policy immediately.

"The big evil for the IMF in Russia in 1998 was the prospect of the central bank funding government debt. The Fed is now even buying mortgage-backed securities," he noted.

"Even before the (Troubled Asset Relief Program) and the expansion of the Fed's balance sheet, total US public and private debt as a percentage of GDP in the US stood at 290 percent, that figure is now far higher," Wermuth added.

"US credit risk is huge and America has two options, either default or let the currency depreciate substantially against currencies such as the yuan and the rouble," he explained.

"Last night's news from the Fed simply creates the right conditions for dollar weakness and a reduction in US liabilities to foreign investors and governments," Wermuth said.

Bit of balance for RB's posts.

Rule Britannia. ;)

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http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiFjnanrDWVk

U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff

Commentary by Laurence Kotlikoff

Aug. 11 (Bloomberg) -- Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

Double taxation and wages WRT liabilities, or...? I'm not saying a word.

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http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiFjnanrDWVk

U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff

Commentary by Laurence Kotlikoff

Double taxation and wages WRT liabilities, or...? I'm not saying a word.

Boomers will take it up the anus-they have to. No way that you can tax the earners anymore than now. Has to be the retirees.

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Guest UK Debt Slave

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiFjnanrDWVk

U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff

Commentary by Laurence Kotlikoff

Double taxation and wages WRT liabilities, or...? I'm not saying a word.

Absolute shocker isn't it?

No wonder politicians are so desperate to peddle ponzi scams. Confronting the reality of our predicament would absolutely destroy democracy overnight

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Absolute shocker isn't it?

No wonder politicians are so desperate to peddle ponzi scams. Confronting the reality of our predicament would absolutely destroy democracy overnight

Daily mail front page tomorrow:

"US in collapse of empire playbook shocker".

It comes to us all, eventually.

The bigger they are...

Personally, I'm waiting for China to peak.

Edited by AvidFan

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"US credit risk is huge and America has two options, either default or let the currency depreciate substantially against currencies such as the yuan and the rouble," he explained.

What would be the mechanism which the US would use to default? And what would be the consequences? :unsure:

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"US credit risk is huge and America has two options, either default or let the currency depreciate substantially against currencies such as the yuan and the rouble," he explained.

What would be the mechanism which the US would use to default? And what would be the consequences? :unsure:

Treasury hair cuts.

But if they're out by a few trilion - that's China's holdings worth literally nothing.

I wonder why the US federal reserve has a balance sheet of $2 trillion and China has $2 trillion in treasury holdings? There's a relationship there somewhere...

Edited by AvidFan

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Treasury hair cuts.

But if they're out by a few trilion - that's China's holdings worth literally nothing.

I wonder why the US federal reserve has a balance sheet of $2 trillion and China has $2 trillion in treasury holdings? There's a relationship there somewhere...

I don't see why. Please explain. The Fed buys whatever (MBS's say), the Chinese buy Treasuries, don't see the connection, just coincidence in numbers.

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Daily mail front page tomorrow:

"US in collapse of empire playbook shocker".

It comes to us all, eventually.

The bigger they are...

Personally, I'm waiting for China to peak.

This.

Jobs will flow back to US and West.

China is fubar'd.

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This.

Jobs will flow back to US and West.

China is fubar'd.

Why? Even if there is a big collaspe the machinery and means of production is still there. The amount of capital to rebuild manufacturing infrastructure in the UK would be enormous. Not to mention many of the sites of old factories have had houses built on them. The NIMBYS will prevent factories to be built and will demand market value and then some under compulsory purchases. What do you thnk we are china? Where you can send a death squad to murder the inhabitants of a village rather than pay for the land and relocation?

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I don't see why. Please explain. The Fed buys whatever (MBS's say), the Chinese buy Treasuries, don't see the connection, just coincidence in numbers.

Not exactly an ideal explanation but... I see an economy running trillion-dollar deficits and a central bank with trillion-dollar QEs per year. Only half of that is fundable by "growth" of 5%, i.e. 5% devaluation of 100% national debt of $14T = $1T. The other half is being spent but isn't funded. The article mentions the 2:1 discrepancy.

Hence - budget deficit is roughly being funded by devaluation ("growth"). The remainder (another 50% which is structurally unsustainable according to the article) is being funded by the fed.

I'm sure there isn't a relationship between the Fed's balance sheet and Chinese treasury holdings... but if I was running an economy that was 50% out of whack, I'd want to spread the borrowing equally to "credit-worthy entities", wouldn't you?

Edited by AvidFan

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Why? Even if there is a big collaspe the machinery and means of production is still there. The amount of capital to rebuild manufacturing infrastructure in the UK would be enormous. Not to mention many of the sites of old factories have had houses built on them. The NIMBYS will prevent factories to be built and will demand market value and then some under compulsory purchases. What do you thnk we are china? Where you can send a death squad to murder the inhabitants of a village rather than pay for the land and relocation?

Exactly, no chance of it ever returning to the UK - use it or lose it - planning - 5 years to find site - just forget it and do it abroad.

I was seriously thinking about starting uup small manufacturing outfit - spend cash on house and invest the rest - not now, not never - probbaly won't even bother at all or just send the designs abroad.

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Why? Even if there is a big collaspe the machinery and means of production is still there. The amount of capital to rebuild manufacturing infrastructure in the UK will be enormous.

Corrected for you there. Wage arbitrage can cut both ways. I am fully expecting a manufacturing boom in the UK at some point in my lifetime, once the high cost property Ponzi scheme has finished collapsing under its own ridiculous weight and it becomes profitable to employ British workers to manufacture ordinary consumer goods without government subsidies. It will be a good time to be a worker.

Edited by Dorkins

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Btw why is this news?

We've had Injin tell us about this for the past 4 years on a regular basis hardly a surprise though is it?

Because these two guys today have gone public - plus the Fed's latest move to support QE + dividend reinvestment... it's obvious. They're trying to trash the US publicly to get the dollar down...

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Not exactly an ideal explanation but... I see an economy running trillion-dollar deficits and a central bank with trillion-dollar QEs per year. Only half of that is fundable by "growth" of 5%, i.e. 5% devaluation of 100% national debt of $14T = $1T. The other half is being spent but isn't funded. The article mentions the 2:1 discrepancy.

Hence - budget deficit is roughly being funded by devaluation ("growth"). The remainder (another 50% which is structurally unsustainable according to the article) is being funded by the fed.

I'm sure there isn't a relationship between the Fed's balance sheet and Chinese treasury holdings... but if I was running an economy that was 50% out of whack, I'd want to spread the borrowing equally to "credit-worthy entities", wouldn't you?

Makes sense-thanks. I was just trying to the direct link between the two 2T numbers. Whatever it's just absolute madness.

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Corrected for you there. Wage arbitrage can cut both ways. I am fully expecting a manufacturing boom in the UK at some point in my lifetime, once the high cost property Ponzi scheme has finished collapsing under its own ridiculous weight and it becomes profitable to employ British workers to manufacture ordinary consumer goods without government subsidies. It will be a good time to be a worker.

I agree to some extent but the time-frame to achieve this may be very long. I accept that deflation is poison to banks holding assets as colateral but what about the low wage earner if "stuff" continues to go down in price? Problem is that "stuff" does not include food and essentials.

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Makes sense-thanks. I was just trying to the direct link between the two 2T numbers. Whatever it's just absolute madness.

Phew. Just to recap - I think I said the US is trying to hold debt:GDP steady by devaluing at the same rate as they are issuing new debt, and that's fine. But because they really want to do that at twice the rate and not have to pay the price, the fed is effectively taking half the hit - carefully engineered as MBS purchases that were (re)mortgages people were taking to live beyond their means.

Of course, we know the real rate of inflation in the US is closer to 10%, so why they are getting away with paying 5% on treasury debt, I'll never know.

If it's a "disguised" 10%, the balance sheets of the US government and fed should repair over time.

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Btw why is this news?

We've had Injin tell us about this for the past 4 years on a regular basis hardly a surprise though is it?

coz its now made msm & is visible to naked eye

you can't deny it unless you live in the US in that case everythins is A OK

only two options left are:

printing (announced yesterday)

&

start wars (in progress)

hot sopts to watch:

North Korea leading to China

Iran

Lebanon

Syria

Venzvula

Cuba

Edited by DisQ

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http://www.cnbc.com/id/38654017

America Is 'Bankrupt Mickey Mouse Economy': CIO

Published: Wednesday, 11 Aug 2010 | 7:09 AM ET

By: Patrick Allen

CNBC Senior News Editor

Bit of balance for RB's posts.

Rule Britannia. ;)

QUOTE: "Wermuth is a fund manager heavily invested in Russia"

Nuff said. Herr Wermuth is a VI who has obviously placed too much on Komrade Putin restoring the Soviet Empire?

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QUOTE: "Wermuth is a fund manager heavily invested in Russia"

Nuff said. Herr Wermuth is a VI who has obviously placed too much on Komrade Putin restoring the Soviet Empire?

And Kotlikoff? Widely quoted by Mr. King I believe - his theories of limited purpose banking, etc.

Oh wait... is he Russian?

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Phew. Just to recap - I think I said the US is trying to hold debt:GDP steady by devaluing at the same rate as they are issuing new debt, and that's fine. But because they really want to do that at twice the rate and not have to pay the price, the fed is effectively taking half the hit - carefully engineered as MBS purchases that were (re)mortgages people were taking to live beyond their means.

Of course, we know the real rate of inflation in the US is closer to 10%, so why they are getting away with paying 5% on treasury debt, I'll never know.

If it's a "disguised" 10%, the balance sheets of the US government and fed should repair over time.

AvidFan

Honestly I don't see much inflation here in the US. The missus keeps an eye on the grocery bill and that's really steady. We have gas heating and the bills are way down (in Jan-April) as natural gas is so low right now. The other gas (petrol) is still around $2.65 a gallon here. Ironic that our gas/electricity supplier are the same entity (Scottish Power).

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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