Minor Thoughts from me to you

Things are getting very bad in Greece.

One of the best sources of news about the Greek social crisis has been the dispatches sent by the BBC correspondent Paul Mason. So we should pay attention when Mason decides to ring the alarm bell.

Last month, the Greek prime minister, Antonis Samaras, warned Europe that his country was on the edge of a Weimar Germany-style social collapse. What I have seen on the streets of Athens convinces me this is not rhetoric. There is a violent far-right party, its MPs committing and inciting violence with impunity; a police force that cannot or will not prevent Golden Dawn from projecting uniformed force on the streets. And a middle class that feels increasingly powerless to turn the situation round.

Is it really that bad? Yes.

How deep is the economic hole? The Greek statistics agency EL.STAT is reporting that the 2011 deficit stood at 9.4 percent of GDP and the public debt at a staggering 170.6 percent. Greece is begging the EU and IMF to release the latest tranche of aid—a staggering 31.2 billion euros ($39.7 billion). Forget trite talk of Greeks losing only their feather-bedded pensions and early retirement. The cuts are deep, the pain real, and the anger white-hot.

The neo-fascist party Golden Dawn won 6 to 7 percent of the vote in the Greek elections of May and June 2012 and is polling at twice that today, as anger rises against the economic austerity measures of the coalition government of Conservatives, Socialists and the Democratic Left.

Recently, the theater director Laertis Vassiliou saw Golden Dawn thugs shut down the play Corpus Christi, assaulting actors while the police—large numbers of whom openly support Golden Dawn—stood by and watched. Golden Dawn MP Christos Pappas was filmed “de-arresting” a demonstrator—removing him from police custody. Vassiliou caught the whiff of Weimar. “People went home with broken bones. Every day they phone me now, they phone the theatre, saying: your days are numbered,” Vassiliou said. “This was the Greek Kristallnacht.”

This is what happens when a nation spends money that it doesn't have for years on end. It's what happens when an increasingly large share of the population depends on that government money (whether through government contracts or through welfare) to survive.

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An oldie from August, that I've been hanging on to, for some reason. Veronique de Rugy breaks down S&P;'s memo about why they downgraded US debt to an AA+ rating.

The bottom line:

In other words, to avoid a downgrade, it would have been key in S&P’s opinion to show signs of willingness to cut (contain) Medicare and other entitlement spending. That didn’t happen, since many lawmakers in Congress (Democrats mainly, though not exclusively) refuse to talk about how much we can really afford to spend on Social Security, Medicare, Medicaid, and other social programs.

As a result, it is difficult to claim that the Republicans’ unwillingness to raise revenue is the only reason for this downgrade. It seems to me that there is enough blame to go around.

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Keith Hennessey explains what the McConnell debt limit proposal is, how it works, and what its political motivations are.

I still support “Cut, Cap, and Balance” as the best long-term plan. While I’d love to see it enacted, I don’t see it happening with this Senate and this President. I’d initially been disposed to strongly dislike the McConnell plan. I actually changed my mind after reading his explanation. I now, reluctantly, support it as the best plan that we’re likely to get past this President and this Congress.

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Keith Hennessey explains the “Cut, Cap, & Balance Act”.

The key to understanding this bill is that it focuses on government spending, rather than on taxes or deficits. The bill would achieve significant deficit reduction through cutting and limiting spending, and all of its mechanisms use spending rather than deficit targets.

Surprise, surprise: the bill consists of three parts.

1. Cut – The bill provides specific numbers to limit both discretionary and mandatory spending for FY12. These numbers would drive further Congressional action this year or else force a Presidential sequester. (I explain a sequester below.) The intent of this section is to force Congress and the President to cut spending immediately.
2. Cap – The bill would establish a new enforceable limit on total federal spending as a share of the economy. The new caps are designed to phase federal spending down to just below 20% of GDP by FY17 and then hold it there through the end of a 10-year budget window in FY21. Put more simply, this is a new enforceable aggregate spending cap.
3. Balance – The bill would increase the debt limit by $2.4 trillion after the House and Senate have passed a Balanced Budget Amendment (of a certain type).

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Reason columnist and Mercatus Center economist Veronique de Rugy explains the truth behind some of the myths in the current debt ceiling debate.

1. If a deal is not reached by August 2, the U.S. will default on its debt.
2. If the debt ceiling isn’t raised the government won't be able to pay Social Security benefits.
3. The Treasury cannot use the Social Security Trust Fund to delay a default past August 2.

You can either read her explanations or watch her explanation on video.

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Very good advice, from Megan McArdle.

If you think that they really need the money, and that you're not just helping someone dig themselves even deeper into financial irresponsibility, then my advice is to just give them the money.

Give them the money?  I can't possibly afford to do that!

Well, my friend, given the default rates of primary borrowers, that is what you're doing when you cosign--with the additional cost of origination fees, interest payments, late fees, collection fees, a black mark on your credit report, and probably, a destroyed relationship.

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We have to cut spending, so that we can stop borrowing, so that we can start paying down our existing debt. Why? Well, if we don't, the interest payments on our debt will soon be the only thing left in our budget.

Is this fear mongering? No, that's actually the best case scenario.

Thanks to the Mercatus Institute and Veronique de Rugy for this info.

How Many 'Flood' Synonyms Do You Know?

Well, given the fit of pique being thrown by most political reporters, the thesaurus isn't adequate to describe the sums of money being spent this election cycle. Four billion dollars? Yes, it is a lot, but consider the stakes. Here's another interesting number: $414 billion -- the interest the Treasury paid on our national debt this year. Worried about foreign money? Try that on for size.

Allison Hayward is the vice president of policy at the Center for Competitive Politics, a nonpartisan, nonprofit group dedicated to protecting First Amendment political rights.

The Myth of the Recovery

The gains on Wall Street have been goosed largely by government spending and guarantees, not the usual private sector–funded growth. And federal spending cannot continue indefinitely without deficits and debt service spiraling out of control. John Silvia, chief economist for Wells Fargo, says, “We have seen a recovery, but it’s driven primarily by federal spending and special federal projects. The character of this recovery is very different than we’re used to.”

Consider that 37 percent of the third-quarter GDP growth was due to motor vehicle purchases, which were stimulated almost entirely by the Cash for Clunkers program. “The third quarter was really just a lot of Cash for Clunkers spending that won’t be sustained in the foreseeable future,” Silvia says. (Final statistics for fourth quarter spending were not available at press time.)

The car scheme, an attempt to jump-start the bankrupt auto industry, offered consumers a government-funded credit of up to $4,500 if they traded in their gas guzzlers for more eco-friendly vehicles. But since most participants probably were already planning to buy a new car, the program essentially shifted future demand for automobiles to the third quarter of 2009. Instead of continuing to grow, car sales dropped 34 percent immediately after the program ended. Figure 1 shows U.S. auto sales in 2009 largely following the 10-year average month-to-month change until the Cash for Clunkers credit jolted demand, followed by a subnormal drop.

This is not real growth. It’s the national equivalent of a credit-card buying spree, with the bills—in the form of debt service and unfunded liabilities—to be paid off later. It is a faux recovery.

Just in case you're case curious, the current projected 10-year U.S. budget deficit is now $9.1 trillion. That's on top of the $11.7 trillion of debt that the U.S. currently owes. The Wall Street Journal has further information on the rather grim news.

CBO predicts that debt held by the public as a share of GDP, which was 40.8% in 2008, will rise to 67.8% in 2019--and then keep climbing after that. CBO says this is "unsustainable," but even this forecast may be optimistic.

Here's why. Many of the current budget assumptions are laughably implausible. Both the White House and CBO predict that Congress will hold federal spending at the rate of inflation over the next decade. This is the same Democratic Congress that awarded a 47% increase in domestic discretionary spending in 2009 when counting stimulus funds. And the appropriations bills now speeding through Congress for 2010 serve up an 8% increase in domestic spending after inflation.

Another doozy is that Nancy Pelosi and friends are going to allow a one-third or more reduction in liberal priorities like Head Start, food stamps and child nutrition after 2011 when the stimulus expires. CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth.

Federal revenues, which will hit a 40-year low of 14.9% of GDP this year, are expected to rise to 19.6% of GDP by 2014 and then 20.2% by 2019--which the CBO concedes is "high by historical standards." This implies some enormous tax increases.

CBO assumes that some 28 million middle-class tax filers will get hit by the alternative minimum tax, something Democrats say they won't let happen. CBO also assumes that all the Bush tax cuts disappear--not merely those for the rich, but those for lower and middle income families as well. So either the deficit is going to be about $1.3 trillion higher than Washington thinks, or out goes Mr. Obama's campaign promise of not taxing those who make less than $250,000.

What would the deficit projections look like it the CBO forecasts matched Congress's behavior? Even more depressing. The Concord Coalition publishes a "plausible baseline" that uses more realistic assumptions. They project the 10-year deficit as $14.4 trillion.

If we continue on the spending path that we're on, we'll more than double the national debt in only a decade.

One more thing. These numbers are what the budget looks like before passing a healthcare bill that's forecasted to add another $1 trillion to the deficit all by itself.

The Wisconsin State Journal published a few local reactions to the Wisconsin's ongoing budget debates. One reaction caught my eye.

Christa Decker of Madison said she depends on Medicaid programs for everything from her wheelchair to doctor's visits to long-term care. Decker, 51, who has both physical and cognitive disabilities, said that cuts to those services would have a direct impact on her life.

"You cannot cut out part of my life. This is too important to me," Decker said.

I'd like to pick on Ms. Decker just a little bit, on my way to illustrating a point. Ms. Decker is supported by money that comes from every taxpayer in Wisconsin and taxpayers from around the nation. Ms. Decker's life is sustained by the work of everyone around her. She's making a fairly common blanket statement: "If you cut taxes, you'll cut the money I depend on and throw my life into chaos."

That is a legitimate worry. Many people have come to depend on the money and services they receive from local, state, and federal governments. But there is another worry too, one that's expressed far less often. "What is the real cost of giving all of this money away?" Let me give you an example, straight out of my own budget. First, here's a breakdown of where our income goes.

Mortgage

25.84%

Taxes

21.42%

Tithe

10.37%

Student Loans

8.65%

Groceries

3.17%

Gasoline

3.04%

The remaining 30% goes into a large variety of small expenses and savings. Notice that $1 out of every $5 dollars we earn, goes straight into taxes. $0.20 out of every $1.00. $21 out of every $100. Gone. Straight off the top. That's a significant fraction of our income. We're a young married couple, just 2 years out of college. There are a lot of things we could be spending that money on. Here's a short list.

• Paying down student loans
• Paying down our mortgage
• Replacing the old roof on our house
• Replacing the ancient windows in our house
• Finishing our basement to increase the living space in our house
• Saving for a new laptop, to replace my wife's rapidly aging one
• Saving for a new car, so we won't have to take out a car loan next time around
• Saving for retirement
• Saving for our children's college education
• Saving to visit my parents, in Papua New Guinea

As you can see, paying down loans and increasing savings is a large part of our financial goals. We'd love to be free of our debt. There are times that it seems almost achievable. For instance, if we weren't paying taxes the past three months we could have either paid of 68% of one of our student loans or 20% of our home equity loan. And that's just in a three month period.

That's the cost of those "free" government services that so many people enjoy. Ms. Decker's life is financed by my family's increased debt and decreased savings. Oddly enough, those are the costs that are most likely to make me need a government handout later in life. Ironic, isn't it?

I don't know where the dividing line between necessary and unnecessary taxes is. And I don't have a plan for weaning the public off of the dole. I'm still thinking about that. But just remember that government services aren't free. And that the money I'm spending on taxes is money that I'm not spending on goods and services -- money that could be used to create jobs and wealth.

Wisconsin's finances are in worse shape than I thought.

According to Wisconsin's Comprehensive Annual Financial Report, or CAFR, the state ended the most recent fiscal year with a $2.15 billion deficit. Unlike state budgets that do not account for all future commitments, thus masking our true financial condition, the CAFR prepared by the state controller's office must follow generally accepted accounting principles (GAAP) from the nation's Governmental Accounting Standards Board and recognize these obligations.

This explains why state budget officials said the 2006 general fund balance was $49.6 million, while the controller put the deficit at $2.15 billion. Last year, Wisconsin was one of only three states with a GAAP deficit and, relative to population, it had the largest deficit in the nation.

Wisconsin has a population of around 5.5 million people. That works out to a deficit of around $400 per person.

It gets worse.

The state controller reported a second figure regarding the state's net assets that also merits attention. Accounting lingo can be confusing; but, in household terms, net assets are simply savings and investments, plus the value of cars, housing, and other property, less any loan debt.

According to the controller, the state's unrestricted net assets for governmental purposes were -$8.23 billion. According to the CAFR, "a positive balance in unrestricted net assets would represent the amount available to be used to meet a government's ongoing obligations to citizens and creditors." Wisconsin cannot now do that without selling roads, buildings, parks, and campuses.

Maybe we should show some restaint in our spending. I'm wondering if the legislators in Madison have considered that? Nah, that'd actually be demonstrating some responsibility -- can't have that in politics.

Last week the Democrats in Congress decided how they'll spend your money. Surprisingly, they won't be letting you keep much of it.

Majority Democrats passed an important test Thursday with approval of a $2.9 trillion budget plan that promises big spending increases for party priorities such as education and health care.

The budget blueprint sets a course to produce a small surplus in five years by assuming that many of President Bush's tax cuts would expire.

Ah, yes. They'll hit all of their spending priorities by taking more of your money. Makes perfect sense.

The House passed the measure by a 214-209 vote without a single Republican voting for it. The Senate quickly followed on a 52-40 vote; moderate Republicans Olympia Snowe and Susan Collins of Maine joined with Democrats.

But deficits under the Democratic plan would be higher over the next two years than the $150 billion to $200 billion the Congressional Budget Office predicts for the current year. A $41 billion surplus is projected for 2012.

They noted it projects a surplus of $41 billion in 2012 by assuming that more than $200 billion worth of tax cuts over 2011-12 "” on income, stock dividends and capital gains, among others "” expire as scheduled at the end of 2010.

Yep. That makes sense. Increase the deficit in the hopes that continually increasing tax revenues will cover the spending spree. Also, assume that the American people will let you hike their taxes by $200 billion.

The budget plan sets the stage for an $850 billion increase in the national debt "” to $9.8 trillion. Under a House rule endorsed at different times by both Democrats and Republicans, adoption of the budget resolution means a separate debt limit increase bill is automatically passed and sent to the Senate.

You know, Congress has the same sense of fiscal responsibility that the Moellering's do. Joy.

Christine and Mark Moellering have a debt problem.

Their credit card debt came to $22,228, including $380 in monthly finance charges. Interest varied from 12.1 percent to 32.24 percent. The Moellerings also have a mortgage of $93,000 and a home equity loan balance of $68,574, at 8 percent interest.

John Leland, of the New York Times, points the finger at changes in federal regulations:

Just a generation ago, financial profiles like the Moellerings' would have been unusual. But changes in federal regulations since the 1980s, along with consolidation in the banking industry and changed consumer attitudes toward borrowing and saving, have made credit more widespread, more heavily marketed and more confusing, with offers of more credit "” at low rates "” extending to even the least reliable risk. In 2006, the industry mailed out nearly 8 billion credit card offers, up from 3.5 billion in 2000.

Credit card debt, less than $8 billion in 1968 (in current dollars), now exceeds $880 billion, more than tripling since 1988, adjusting for inflation, according to the Federal Reserve Bank. Penalty fees alone cost consumers $17.1 billion in 2006 "” up from $12.8 billion in 2003, adjusted for inflation, according to R. K. Hammer, a bank card advisory firm. In part because of the debt burden, the consumer savings rate fell below zero percent in 2005 and has stayed there.

Of course, there could be another explanation. According to the article, they built up their debt over several years: $6,000 in student expenses put on the credit card, $50,000 for a wedding that included rings, a reception, a honeymoon, a new bathroom. Just this past Christmas they bought an $800 42-inch television.

I think the Times wants me to feel sorry for this couple. I don't and I don't think I should. They've made a constant series of bad decisions. Ms. Moellering was "too busy" to apply for student loans, so she put her education on the credit card. They both wanted a nice wedding, so they spent $50,000 on one. Mr. Moellering was too busy to calculate his checking account balance, so he racked up $288 in bank fees. Both were too impatient, so they bought a TV on credit knowing that they already had more debt than they could manage. Their debt problem isn't the fault of federal regulators. Their debt problem is the result of buying things they want -- whether or not they can afford them.

There is a simple trick to understanding the vagaries of credit card contracts and interest rate schedules: make sure that you never put spending on a credit card unless you know that you can pay it off when the bill comes. If you follow that simple principle, you won't end up paying 32% interest. Let's take a look at how this principle could have helped the Moellering's.

Problem: You want to get married. Analysis: You have $161,000 in housing loans and another $6,000 in credit card debt. Decision: Have a small, simple ceremony with family and friends. Ask friends to help cater the reception and enjoy your honeymoon somewhere close to home.

Problem: you just got married and your current bathroom is in poor condition. Analysis: We already have $161,000 in housing loans and another $6,000 in credit card debt. Decision: endure the crummy bathroom. Decide to be thankful that you have an indoor bathroom and not an outhouse like your great-great grandparents.

Problem: you want a new television. Analysis: We already have $161,000 in housing loans and another $6,000 in credit card debt. Decision: Visit the local public library, check Craigslist, and find a used television that you can pay cash for.

Sorry Christine and Mark. I hate to be the person to break it to you. Living life as an adult requires that you take responsibility for your own decisions. Living life as an adult requires you to live within your means, not within your wants. Your debt is your responsibility. Please don't try to blame it on anyone else.

It's something Christine and I aren't doing. However, it looks like Alan Greenspan's legacy just might be helping millions of Americans to get comfortable with debt. The entire linked article is worth reading, but I'll provide a few excerpts:

Today, borrowing against equity in real estate occurs at rates never seen before. Mortgage equity withdrawal was unheard of generations ago - a second mortgage was the last recourse for a family in trouble.

Today it is routine.

Septuagenarians shake their heads as they see young people living lifestyles which don't square with what they know of their incomes and expenses. Debt it seems has not taught any hard lessons lately - debt has become too friendly, too tame, and too forgiving.

In the last three years alone, nearly three trillion dollars of new mortgage credit has been extended - first mortgages, second mortgages, home equity loans, and lines of credit.

Some dismiss concerns of too much debt by pointing to the bottom line.

Debt, they say, is not a problem because household balance sheets are the best they've ever been. Today, household net worth does look impressive - against a meager 12 trillion dollars in debt stands a hefty 64 trillion dollars in assets.

A closer look at net worth, however, shows that while liabilities have marched steadily upward, assets can go up or down

What happens if real estate assets suffer the same fate as equities did a few years ago? Or, what if real estate values simply go flat for an extended period of time?