 | | The Daily Reckoning | Tuesday, May 17, 2011 |
- Steal more or spend less - what's a cash-strapped government to do?
- Your IRA funds at risk...and what you can do to protect them now,
- Plus, Bill Bonner on cab races, maglev trains and the hunt for a new Osama...
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Here's why it's NOT the end of America...
Shocking new presentation reveals epic opportunities - viewer discretion advised for thin-skinned fear mongers. Watch the presentation right here.
|  | | | The Extreme Cost of Government Money-Saving | | A Look at the Feds’ Laughable Debt Reduction Solutions | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Are you paying attention, Fellow Reckoner? What may well go down as the greatest tragicomedy in history is playing out right before our very eyes.
Lucky us!
Some time today - or was it yesterday? And does it even matter? - The United States of America will crash through its so-called "debt ceiling," the somewhat arbitrary $14.29 trillion dollar mark above which it must implement "extraordinary measures" in order to keep the lights on and its "services" running. Such are the extraordinary times in which we live. The event - which inspired little more than a rather sanguine "Humph" in the markets yesterday - sets in motion what The Wall Street Journal describes as an "uncertain, 11-week political scramble to avoid a default."
No doubt about it. The Leviathan is starving, unable to sustain the cost of output the modern welfare/warfare model requires of it. Flailing and squealing under the weight of its own self-imposed obligations, the beast portrays a curious, almost pitiful kind of incompetence, like a slug writhing in the middle of the road on a hot summer's day. We almost - almost - feel pity for the poor, wretched thing. Then we remember what it is, what it does, and we are happy to see it firmly, resolutely marching down the road to perdition.
This year alone, the US Government has committed to pay out $3.7 trillion. Yet it will only take in between $2.1-$2.2 trillion in tax "revenues." As such, its available funds will barely cover 60% of the state's 2011 operating budget. The difference, the budget deficit, will total around $1.65 trillion. Expressed another way, the budget shortfall for this single year is equal to about 12% of total GDP output. Gross federal debt, mind you, is already well over 100% of GDP...and ticking ever northward.
How did it come to this? You'd think the state - being able, as it is, to write its own tax code and to issue its own, legally unchallengeable currency - would have enough of an unfair advantage to keep its head above water. This is not rocket science. All it has to do is spend less than it steals. Any common crook ought to be able to manage that. Ahh...but the government is no common crook. It is a crook of the commons, feasting on the toils of the productive economy only to pour the accumulated wealth and value into the bottomless vortex of its own engorged belly.
One need only take a cursory glance at the absurd debt reduction "solutions" being proposed to understand the mentality required to squander such an exorbitant advantage. Let's start with a proposal from the head of the beast (emphasis added):
"President Obama says he wants to 'trim' $4 trillion from the federal budget over the next 12 years," observed Eric Fry in yesterday's Daily Reckoning. "To most Americans, that sounds like debt reduction. But it's not. It is only a cut in planned spending, the effect of which would make the planned budget deficits slightly less obscene.
"In other words, Obama's 'money-saving' budget proposals would cost America trillions of dollars - trillions that the government does not possess, that taxation alone could not raise and that foreign creditors would be increasingly unlikely to provide."
According to analysis by the Congressional Budget Office (CBO), the president's budget would produce average annual deficits of nearly $1 trillion over the next 10 years. Total indebtedness would soar by a massive $10 trillion over that timeframe, as total annual spending would surge 57 percent - from $3.7 trillion this year to $5.8 trillion in 2021. In reality, these deficit numbers would probably be much higher still.
"The CBO's terrifying projections include an array of hopeful assumptions," continued Eric, "the most significant of which are that interest rates remain near generational lows and that tax revenues climb at a robust pace. The president is counting on tax revenues to double over the next ten years."
Adding his two cents to the dearth of intelligent discussion emanating from the nation's halls of power, former Treasury Secretary Robert Rubin had this to say on the matter:
"I think the failure to meet any commitment would be viewed by the markets as default and would be deeply unnerving."
"We don't know" what would happen in the event of default, warned Rubin, who is perhaps best know for raiding pension funds during the Clinton era in an effort to maintain the appearance of an honest budget. "But I think it is totally irresponsible to take the risk of trying to find out."
Apparently escaping the former secretary's mind is the irresponsibility of continuing to add more debt to a system already unable to meet its current obligations. Had the US simply defaulted during his tenure as Secretary, it might find itself in a more credible situation today...possibly without a decade and a half of reckless malinvestment piled on top of the already shaky foundation he helped to erect in the first place.
To be fair, living within one's means can at times be difficult. It is responsible, yes. And it is honest. But it can be difficult. Nevertheless, this is what the market requires, to one extent or another, of all non-governmental entities. Spend more than you earn for too long and you go broke. Try it if you don't believe us.
Of course, the government is not a non-government entity at all. Ergo, rather than tighten its belt, rather than do what is responsible and honest, the state simply extends the limit on the national credit card, rolling over old debt with newly borrowed money...money to one day be repaid by people who are not yet born and who, conveniently for the state, therefore have no say in the matter whatsoever. To hoodwink the living is easy. To steal from the future...ah, that takes a concerted application of moral depravity.
In fact, Secretary Timothy Geithner is already engaging in various "extraordinary measures" to stave of the Day of Reckoning. Reports The Washington Post:
"Geithner, who has already suspended a program that helps state and local government manage their finances, will begin to borrow from retirement funds for federal workers."
But not to worry. The Feds are "legally required to reimburse the program," writes the Post. Hmmm...
The maneuver, employed in tandem with a few other accounting sleights of hand, only buys Geithner a couple of months, according to the Post. Then what?
When asked why he robbed banks, Willie "The Actor" Sutton famously replied, "Because that's where the money is."
Now... Where might a greasy mitted bureaucrat find a fat, juicy pile of someone else's cash to pilfer? Any guesses?
In today's reckoning, guest editor Simon Black offers his insight on the matter...along with one specific way you can protect what's yours...
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| | The Daily Reckoning Presents | | Taking Control of Your IRA | |  | | Simon Black |
Following in the footsteps of a rather ignominious list of nations like Argentina and Hungary, the government of Ireland is set to take its 'fair share' of private retirement funds.
Drowning in debt and faced with unrealistic, ridiculously unpopular austerity measures, the government has announced that it will now tax private pension savings in order to raise 470 million euros (roughly $675 million) per year...a lot of money in a country of only 4.4 million people.
Somehow, the government expects to be able to create 100,000 jobs to bring down an unemployment rate at 14.7%. Perhaps they plan on hiring 100,000 new workers to go around the country and collect the tax.
It reminds me of what I saw in Bolivia a couple of weeks ago - there's a tax or toll or fee for nearly everything you do. Driving on the highway (if you can call it that) outside of Santa Cruz, you pay a toll...obviously not for the maintenance of the road, but to pay the salary of the toll collector.
At the airport, you have to pay an airport tax before departure...obviously not for the upkeep and efficiency of the airport (it took 2-hours to make it to my gate), but to pay the salaries of the guys who collect the airport tax.
This is what politicians consider 'job creation,' yet these positions only serve to destroy value. That they would stick up the retirement funds of hard working people is even more immoral.
Here's the best part, though. If you are a government worker in Ireland, your pension is exempt. They're only going after people in the private work force. It's truly disgusting logic to force private workers to pay for years of political incompetence while absolving government employees.
Coincidentally, there are a few other loopholes as well, particularly for non-residents and non-resident funds. Apparently those Irish who saw the writing on the wall and got busy moving themselves and their assets offshore will get to keep all of their savings.
Ireland is not the first country to call this play, nor will it be the last. Pension funds are attractive targets for politicians who have wide eyes and the most carnal thoughts at the site of any large pool of cash.
Think it can't happen where you live? Think again. Late last year, the French governmentwent through an elaborate process to change its pension laws, 'legally' allowing politicians to steal retirement funds from the public in order to pay off other debts.
In the US, public pensions have been raided for years; Congress routinely 'borrows' from Social Security to make up budget shortfalls. This is what talking heads mean when they play down concerns of a $14 trillion debt "because we owe it to ourselves-" $4.6 trillion of the debt is owed to intragovernmental agencies like Social Security.
Chances of this money being repaid to Social Security in full? Slim. The trend is more debt, not paying off existing debt. In fact, I'm convinced that politicians have their eyes firmly fixed on the trillions of dollars in private, individual retirement accounts (IRAs) in the United States to fund new spending.
Here's how it will go down:
First, there will be some event...some sort of financial cataclysm, similar to the market meltdown we saw in 2008 after Lehman.
Bear in mind that most IRAs are managed by boneheads at big financial institutions; they get compensated not based on the performance of their portfolio, but on the total amount of assets under management. Your interests and their interests do not align.
As such, most IRAs are callously tossed into S&P index funds or some such generic vehicle, citing the safety of broader market diversification, as if that nonsense they teach in MBA finance classes is how the real world actually works.
When a big crash occurs, these unhedged broad market positions get hammered the most. Don't worry though, your fund manager will still get a big fat bonus check, because his performance is irrelevant.
This is when Congress will step in. Citing its desire to 'protect' the American people from future market shocks, the politicians will mandate that a portion of all managed retirement funds be invested in the 'safety and security' of US Treasury bonds. And, just to be on the safe side, let's park them in 30-year bonds that yield 4.35%.
Sound fair? Well who asked you anyways... just be a good citizen and turn over your money already. The important part is that the big financial institutions still get their big fat fees, and the government gets its hands on the mother lode.
This is how US taxpayers will end up being forced to loan their hard earned retirement savings to the government at rates far below any expected inflation.
Right now, there is a window of opportunity to take action; US taxpayers with retirement accounts can set up a special kind of IRA structure that allows you to take control of your retirement savings, and even ship it offshore if you want to, completely legitimately.
After taking control of your IRA, you can do any number of things - buy and store gold and silver coins overseas; hold foreign currencies in an offshore bank account; buy securities on international stock exchanges; purchase agricultural property overseas, or even a beautiful apartment on the beach in some sunny country.
The possibilities are incredible...but the most important thing is that you get this retirement money off the radar of the politicians before they pull an Ireland and announce some new measure, virtually overnight. These things can happen very, very quickly.
I've talked about this before a number of times, and every time I read the news of yet another country taking this approach, it serves as a reminder to take action.
If what I'm saying makes sense to you, my recommendation is to check out Terry Coxon's book on this subject, Unleash your IRA. As one of the world's foremost experts on this strategy, Terry walks you through the process of protecting your retirement savings quickly and legitimately. You can read more about it here.
Regards,
Simon Black, Sovereign Man Senior Editor
for The Daily Reckoning
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..that only a handful of Americans know about.
And with Social Security becoming less and less of a guarantee, now is the time to act.
Click here now and discover a way to protect your retirement from the uncertainties surrounding Social Security.
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| | | | Bill Bonner | | Traveling at the Speed of China | |  | | Bill Bonner |
Reckoning from Paris, France...
Last night...
We're racing to the airport at Pudong. We don't know why we are racing; there is plenty of time. But the driver seems to want to set a new land speed record for a taxicab.
He's rocketing along at 100 mph. The cab weaves flawlessly through the traffic.
But what's this? The cab driver has taken both hands off the wheel. He is putting in a CD. Moments later...what da...?
Country road, take me home, to the place, I belong...
West Virginia, mountain mamma, take me home... This is no country road. It is about the most modern highway we have ever been on. Flyways...flyovers...bridges...elevated highways...we have just gone over the river on a bridge that looks like it was built yesterday. Now, we are cruising along through the smog in 8 lanes of traffic.
Over on the left, a ghost city is barely visible through the gray haze. It must have dozens...no hundreds...of office and apartment towers. There is a huge parking lot on the left...and then, in the distance...another city. We see only the shapes. But it is a city as big as Bethesda...no, as big as Baltimore....
We continue our Taxicab 500...passing cars on the left...then on the right...and then, right through the middle... slipping through a narrow space with cars and trucks on both sides.
Again on the left is another of these spectral cities... Is it Cleveland? Is it San Diego? In size, it could be either. We left downtown Shanghai a half an hour ago. But we are still passing through towns...industrial parks...and building projects. There must be a dozen cities the size of Baltimore between the center of Shanghai and the airport.
The airport, of course, is new...like everything else...and colossal. It is Dulles in style. But bigger, many times bigger.
Can there be any doubt that China is destined to become the world's economic superpower? It has the size...the energy...the know-how. And it has the money.
One of our Dear Readers in Shanghai enlightened us:
"I came here 20 years ago. Then, we foreigners had so much more power and money...and technology. We could call the shots.
"Our company still does about half its manufacturing in the US. The local companies here in China can beat us on price every time. And the contracts are huge, so we can make a lot of money here...even with low- cost, relatively low-margin products. But the top quality stuff still comes from the US. The Chinese have not quite caught up - partly because the market here doesn't want too much quality.
"There's such a fast turnover. People don't want to pay for products that will last too long. Things are changing too fast.
"So for now, the quality here on many items still isn't up to US standards. It's just a matter of time, though. I'm going to retire in 5 years. I figure that's about as long as we're going to be able to do these deals. After that, it's all over. They won't need us. They have the money. They have the skills and technology. We won't have anything to offer."
Generally, the more you do something the better you get at it. The Chinese are making more cars...more highways...more trains...more office buildings and more of everything than anyone else. It is no wonder that they are doing these things well - maybe better than anyone else too.
A new train service between Shanghai and Beijing begins next month. Trains will travel between the two cities at up to 300 kilometers per hour. Already, a high-speed maglev train takes you from the airport to the city so fast that you arrive before you find a seat.
But so what? You're probably wondering. So are we. So what if the Chinese take the lead in wealth and innovation?
And more thoughts...
Dow down on Monday. Oil below $100. Gold below $1,500. Everything seems to be correcting. How far will it go? Heaven only knows...and heaven ain't talkin'!
*** You remember those 5 big trends we mentioned yesterday? You don't? Well, we'll repeat them:
1) The Great Correction - in many of the advanced economies, but centered in America...
2) The continued rise of the developing economies...not just in Asia, but in Latin America and Africa, too.
3) The increasing scarcity of cheap energy, land, water and raw materials.
4) The decline (suicide might better describe it) of the American Empire.
5) The approaching end of the dollar-based world financial system. The interesting, and frustrating, thing about these trends is that they all intersect in various ways at various times...setting up collisions that are as unpredictable as they are hazardous.
You'll notice, too, that the China story runs right through the middle of them, like a tanker truck through a pizza parlor. It is the central story to the rise of Asia and the developing economies. It is a large part of the reason low-priced commodities and natural resources are disappearing. The Chinese currency is almost sure to rise as the dollar-based world financial system comes apart. And China is also the likely successor to the US Empire.
We have neglected this theme for years - ever since we published (with Addison Wiggin) our opus on the subject, Empire of Debt. But the killing of Osama bin Laden reawakened our interest.
One of the few things we don't wonder about is why the feds killed Mr. bin Laden. It would have been far too messy and uncomfortable for them to put him on trial. After all, before he was America's greatest enemy, he was one of her greatest friends.
Yes, dear reader. Mr. bin Laden rendered much service to the US Empire, specifically to the US defense establishment. First, he set up Al Qaeda, with CIA help, to harass the flank of America's most powerful enemy - the Soviet Union. Then, when the Soviet Union fell, the defense industry was despondent. There was no longer any need to invest such a huge part of America's treasure on 'defense' when there was nothing to defend against.
With no plausible threat, the defense budget would have been easy prey for the budget hawks. But then, in their hour of need, like the Argentine generals coming to the aid of Maggie Thatcher's approval ratings, Osama bin Laden came to the rescue. At least, so it appears. We would have been very curious to find out more about his role in the 9/11 attack; unfortunately, the trial of Osama bin Laden was cut short by two bullets fired at close range.
Not that we're criticizing. If we were in a position of power, we probably would have wanted him to disappear too. The last thing anyone in the CIA would want to see would be Osama shooting his mouth off in front of the whole world.
According to The Atlantic magazine, bin Laden triggered $3 trillion of spending by the US. How much of that ended up in the pockets of defense contractors? One percent? Five percent? We have no idea, but even 1% would be a $30 billion windfall, probably about equal to the annual profits of all the world's automobile companies combined.
But now what? Osama is in Davy Jones' locker. And the US is headed to bankruptcy. Will the Pentagon and its suppliers go gently into that good night - of budget cuts and shrinking profits? Or will they rage...and find a replacement for Mr. bin Laden? China, perhaps?
Stay tuned.
Regards,
Bill Bonner
for The Daily Reckoning |
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