Friday, January 28, 2005

Lehman Bros research dept discovers hole in the Willful Ignorance Zone Layer

"While the U.S. economy looks solid on the surface, there is a hole in the roof, and it is
getting bigger. The trade deficit jumped from an upwardly revised $56.0 billion in October
to $60.3 billion in November. That is $7 billion bigger than expected and easily a new
record. There was nothing fluky about the number. The widening reflected a $2 billion drop
in exports and a $2 billion increase in imports. Removing noisy, special factors, such as
aircraft and petroleum, shows a similarly wider deficit. The widening was “real” rather than
an artifact of changing prices. In particular, the widening cannot be blamed on a temporary
“J-curve” effect—where a weak currency pushes up the price of imports, worsening the trade
balance—because prices have not changed very much.

Over the past five years, the monthly trade deficit has tripled. Every time the numbers improve
for a month or two, optimists argue that the long worsening is over [however] the
trade balance improved slightly during the 2001 recession and seemed to plateau in 2003,
but each time it has resumed its relentless path downward.

Unfortunately, it appears that the deterioration is far from over..."

... the answer is simple: sell greenbacks, buy Euros.
... How's that working for ya?

Wednesday, January 26, 2005

The Speech Bush Should have Given

"If ignorance ever goes to $40 a barrel, I want drillin' rights on that man's head."
Texas Agriculture Commissioner Jim Hightower

This is the speech Bush had given in fall, 2002, as he was trying to convince Congress to give him the authority to go to war against Iraq...

"My fellow Americans:

I want us to go to war against Iraq. But I want us to have our eyes open and be completely realistic.

A war against Iraq will be expensive. It will cost you, the taxpayer, about $300 billion over five years. I know Wolfowitz is telling you Iraq's oil revenues will pay for it all, but that's ridiculous. Iraq only pumps about $10 billion a year worth of oil, and it's going to need that just to run the new government we're putting in. No, we're going to have to pay for it, ourselves. I'm going to ask you for $25 billion, then $80 billion, then another $80 billion. And so on. I'm going to be back to you for money more often than that unemployed relative that you don't like. The cost of the war is going to drive up my already massive budget deficits from about $370 billion to more like $450 billion a year. Just so you understand, I'm going to cut taxes on rich people at the same time that I fight this war. Then I'm going to borrow the money to fight it, and to pay for much of what the government does. And you and your children will be paying off that debt for decades. In the meantime, your dollar isn't going to go as far when you buy something made overseas, since running those kinds of deficits will weaken our currency. (And I've set things up so that most things you buy will be made overseas.) We'll have to keep interest rates higher than they would otherwise have been and keep the economy in the doldrums, because otherwise my war deficits would cause massive inflation.

So I'm going to put you, your children, and your grandchildren deeply in hock to fight this war. I'm going to make it so there won't be a lot of new jobs created, and I'm going to use the excuse of the Federal red ink to cut way back on government services that you depend on. For the super-rich, or as I call them, "my base," this Iraq war thing is truly inspired. We use it to put up the deficit to the point where the Democrats and the more bleeding heart Republicans in Congress can't dare create any new programs to help the middle classes. We all know that the super-rich--about 3 million people in our country of 295 million-- would have to pay for those programs, since they own 45 percent of the privately held wealth. I'm damn sure going to make sure they aren't inconvenienced that way for a good long time to come.

Then, this Iraq War that I want you to authorize as part of the War on Terror is going to be costly in American lives. By the time of my second inaugural, over 1,300 brave women and men of the US armed forces will be dead as a result of this Iraq war, and 10,371 will have been maimed and wounded, many of them for life. America's streets and homeless shelters will likely be flooded, down the line, with some of these wounded vets. They will have problems finding work, with one or two limbs gone and often significant psychological damage. They will have even more trouble keeping any jobs they find. They will be mentally traumatized the rest of their lives by the horror they are going to see, and sometimes commit, in Iraq. But, well we've got a saying in Texas. I think you've got in over in Arkansas, too. You can't make an omelette without . . . you gotta break some eggs to wrassle up some breakfast.

I know Dick Cheney and Condi Rice have gone around scaring your kids with wild talk of Iraqi nukes. I have to confess to you that my CIA director, George Tenet, tells me that the evidence for that kind of thing just doesn't exist. In fact, I have to be frank and say that the Intelligence and Research Division of the State Department doesn't think Saddam has much of anything left even from his chemical weapons program. Maybe he destroyed the stuff and doesn't want to admit it because he's afraid the Shiites and Kurds will rise up against him without it. Anyway, Iraq just doesn't pose any immediate threat to the United States and probably doesn't have anything useful left of their weapons programs of the 1980s.

There also isn't any operational link between a secular Arab nationalist like Saddam and the religious loonies of al-Qaeda. They're scared of one another and hate each other more than each hates us. In fact, I have to be perfectly honest and admit that if we overthrow Saddam's secular Arab nationalist government, Iraq's Sunni Arabs will be disillusioned and full of despair. They are likely to turn to al-Qaeda as an alternative. So, folks, what I'm about to do could deliver 5 million Iraqis into the hands of people who are insisting they join some al-Qaeda offshoot immediately. Or else.

So why do I want to go to war? Look, folks, I'm just not going to tell you. I don't have to tell you. There is little transparency about these things in the executive, because we're running a kind of rump empire out of the president's office. After 20 or 30 years it will all leak out. Until then, you'll just have to trust me."

--Juan Cole

Tuesday, January 25, 2005

Uncle Sam gets an 'F' in money management

"When you watch how the U.S. government mishandles our money, it's clear we're in for years of trouble. In some ways, we're heading in the completely wrong direction.

By Jim Jubak

If you had a choice, would you let the U.S. government manage your money?

OK, OK. So it was a rhetorical question. But humor me. I know I wouldn't let it.

The U.S. government violates every single one of the five rules for managing debt that I laid out in my last column, "5 ways to make your debt work for you."

This isn't a failure limited to the Bush administration or the Republicans who now control Congress. For administration after administration, no matter which party held the White House and Congress, the federal government has consistently violated the standards of sound financial management. None of us, given a choice, would ever, ever let anyone with the U.S. government's record of financial management touch our money. And any household that managed its money so foolishly would be headed for bankruptcy.

Unfortunately, most of us don't have a choice about letting the government touch our money. The government's hand reaches deep into all of our personal finances. But we do have some say, if we fight hard to exercise it, about how that money is managed in the future.

An 'F' for Uncle Sam
Today, Jan. 25, is the day the Congressional Budget Office issues its "Budget and Economic outlook," and as we wait for President Bush to deliver his own budget, I think it's a good time to step back from arguing about the details of any specific budget plan and look at the terrible job that our government does at managing our money and the consequences of that mismanagement.

Let's start by looking at how the government does on the five rules for managing debt that I explained in my last column.Meet Jim
in Orlando at the
2005 World Money Show.

Why start with a look at how the government manages its debt? First, because it's a useful indicator of how the government manages all of our money. Second, because with the annual budget deficit running at $400 billion to $500 billion for the next few years before accelerating as the demographic rubber meets the road, we're likely to add the huge sum of $5 trillion to the total federal debt over the next 10 years. Third, the cost of servicing that debt, already 7% of the annual U.S. budget, is likely to climb, costing each household in the United States an extra $3,000 in interest payments each year by the end of the that 10 years, according to the Brookings Institution. And, fourth, because the total U.S. debt is increasingly the 600-pound gorilla that drives interest rates, the value of the U.S. dollar, and decisions on how much the U.S. government can spend on "discretionary" fripperies such as education, environmental protection, securities regulation, food and drug safety, and homeland security.

Overall, the government earns an 'F' on debt management. But the score is even worse when you look at how the U.S. government does on each of my five rules of smart debt management. In some areas, the government isn't merely failing to do a good job; it's actively and aggressively headed in exactly the wrong direction.
Tracking the debts
Rule No. 1: Does the government draw up a separate capital budget that distinguishes between debt used to buy productive assets and debt used for day-to-day operations?
Accounting experts and budget reformers have been after the federal government to do this for years. The progress so far? Zero. Zip. Zilch. The government continues to lump capital investments that add to national wealth over time such as, say, additions to the Interstate Highway System or new national parks, together with operating expenses such as the cost of highway maintenance or the salaries of park rangers. The only time the government separates capital investments from its operating costs is when a politician adds up the value of the assets the government owns to demonstrate that we are financially OK/financially in peril because the value of those assets is about the size of the national debt.

Rule No. 2: Does the government match the duration of the debt to the life of the asset, whether it's on the capital investment or consumption side of the budget? Well, golly gee, no way. I don't think there's a more striking example of the government's financial mismanagement than this. What do you think is at the root of the current funding crisis in Social Security and Medicare? These programs create long-term obligations: The government will pay retirement income to and the medical costs of a 20-something worker in 40-something years. That creates a predictable future obligation with a present value of about $45 trillion. (Social Security accounts for about $7 trillion of that. Which does raise the interesting question -- Why is so much more attention being focused on the much smaller, although still huge, problem?)

To fund this long-term obligation, the federal government collects Social Security and Medicare taxes now. Does the government invest in long-term bonds or equities so that it matches the maturity of the obligation with that of the investment asset? Of course not. Most of the revenue collected from current taxes is used to pay current benefits. The surplus, and right now there is a surplus, goes into a trust fund for Social Security or Medicare, where it is in invested in "special issue," bonds created for the trust funds and only available to the trust funds. The interest rate, according to the Social Security Administration, on a special issue is the average of the interest rates on all U.S. Treasury notes and bonds of more than four-year maturities.

Can you see the three problems with this? First, since the interest rate on a special issue is an average, it is always lower than the yield on the longest U.S. Treasury bond. So in 2002, when the 30-year Treasury bond was paying 5.43%, the Social Security trust fund was buying special issues with an average yield of 4.87%. Second, since these special issues cannot be sold on the public bond market, the trust funds can't reap any capital gains on the bonds if interest rates fall. Special issues can only be redeemed by the U.S. Treasury at face value. So the trust funds missed, for example, the spectacular appreciation that other bond investors reaped as interest rates on 20-year Treasury bonds fell to 5.43% in 2002 from 13.01% in 1982. And, third, since the U.S. government has discontinued the 20-year and 30-year Treasury bond series, the trust funds are buying special issues with lower yields and implied shorter maturities even as the life span and thus the duration of the obligation owed to U.S. retirees increases.

No repayment plan
Rule No. 3: Does the government set up a sinking fund to pay the debt for those long-lived assets in its capital budget?
OK, stop laughing. This is serious. It's the future, or at least somebody's future, that we're talking about here. There is no plan to pay off the national debt. President Bush's pledge to cut the deficit in half refers only to the level of the annual deficit and not to the national debt. If he can make good on that promise, which is unlikely absent exceedingly creative accounting that shifts costs to the years after this administration has left office, all that will do is slow the rate at which the national debt increases. As of Jan. 21, the publicly held national debt came to $7.6 trillion. In November, Congress voted to raise the ceiling for how much the United States could borrow to $8.2 trillion, so you know where the politicians' heads are at. There is no plan to ever pay off the national debt. There's only the hope that we can keep borrowing to roll over old debt as it matures and to pay for those annual budget deficits.

Rule No. 4: Does the government actively strive to drive down the cost of borrowing so that we'll pay less interest on existing and future debt? Not so you'd notice it. In fact, I'd argue that current government budget policies will drive up interest rates on the publicly held debt in the next decade. (This follows on the decision of the previous administration to do away with the 30-year bond so that the government couldn't lock in the low bond yields of the late 1990s for the long run.) Running the printing press to fund annual deficits has its cost: The government (which in this case means those of us who pay taxes) have to pay investors (in this case overseas investors since Americans don't save enough) to buy and hold dollars (in the form of Treasury bills, notes, and bonds). At some point, especially now that the dollar's fall has put investors on notice that the dollar might decline in value in the future, we'll have to pay overseas investors more to hold dollars. Paying more means higher interest rates on U.S. debt instruments. Not yet; foreigners stepped up to the window in a big way to buy dollars in December. But inevitably; As long as we run huge annual deficits, higher interest rates are guaranteed. The debt-management policies of the U.S. government will add more debt and at higher interest rates to our balance sheet.

Not even working on it
Rule 5: Never relax. Managing that spread is an ongoing task. I don't think the U.S. government is even a player in the spread game. Congress and the president many administrations ago decided to cede economic policymaking to the Federal Reserve. Congress got to spend -- and spend without accountability. The Federal Reserve manages interest rates.

Congresses and presidents have put us in this bind by taking the easy way out, administration after administration, when it came to hard budget decisions. And those of us who vote have let the politicians get away with it.

Looking at the battles ahead over the Bush administration's budget, over Social Security and Medicare, and over the tax system as a whole, I can see two distinct alternatives. One, like a family tightening its belt to avoid being overwhelmed by debt, we can start to make the tough and painful cuts we need to make. Two, we can hope that someone else will pay.

Guess which alternative I think is more likely. Here's a hint. My next column is called "Let junior pay for it."