Government spending

Food Stamps For The Wealthy – Millionaires Meet Eligibility Requirements

January 19, 2012 by admin Leave a Comment

Newt Gingrich started a food fight at the last Republican debate by calling Barrack Obama “The Food Stamp President” and suggesting that food stamps were creating dependence on the government. Mr. Gingrich went on to say that he wanted to “help poor people learn how to get a job” so that they could get off the food stamp dole.

Although Mr. Gingrich’s pitch for individual self reliance and hard work resulted in a standing ovation from the Republican audience, the message may not play out as well across the broad spectrum of American society.

For decades, politicians have told the American public that they are entitled to all sorts of benefits and the public has grown to love them. Promises of benefit cuts or austerity measures do not win elections. In this regard, Mr. Gingrich may lose more votes than he gains by trying to reduce the number of food stamp recipients. (The food stamp program is now known as the Supplemental Nutrition Assistance Program or SNAP).

Courtesy: inquisitr.com

All well intentioned government entitlement programs expand exponentially over time. The number of food stamp recipients has exploded to a record 44.7 million people and this is a voting bloc to be reckoned with. Newt’s somewhat hostile message to food stamp constituents has probably lost him a considerable number of votes.

Mr. Gingrich, who has an incredible depth of knowledge on most topics, seems to be unaware that food stamps have become an entitlement not just for the poor, but also for many who are financially independent and chose not to work or have retired early.

Here’s an example I looked at for a married couple in Connecticut who both chose to retire at the age of 50 since they are financially independent with $5 million in liquid assets. Since they will live off their savings until they start receiving pensions at age 60, the couple has no “earned income” and can therefore qualify for a decade’s worth of food stamp benefits.

Exactly how can multimillionaires qualify for food stamps? The reasons lies in the lack of asset testing for SNAP eligibility. Connecticut, like 34 other states, does not limit eligibility based on assets. Most SNAP applicants, except for limited exceptions, do not have to report money in the bank, retirement assets, stocks or other assets.

According to the handy benefit calculator from the Connecticut Department of Social Services, the multimillionaire couple cited above are eligible for food stamps to the tune of $367.00 per month.

The food stamp program has grown not only due to tough economic times but to vastly widened eligibility guidelines. The SNAP program costs the taxpayers over $75 billion per year. Here’s a partial listing of who can qualify for food stamps.

Non-citizens
Unemployed
Retired social security recipients
Working people with low wages
Homeless
Legal immigrants
College students
Millionaires showing little or no earned income

The graph below from The Wall Street Journal shows the explosive growth in the SNAP program since 1970.

Courtesy: The Wall Street Journal

Mr. Gingrich drew some well deserved applause for trying to reassert the basic values of American free enterprise and self reliance. However, based on the vast voting constituency that is now on the food dole, reducing or eliminating the food stamp program is a political impossibility.

More on this topic:

The Entitlement Society – Million Dollar Lottery Winner Feels Entitled To Food Stamps – “I have bills to pay.”

Filed Under: Connecticut, Government Deficits, Government spending, Have Nots, Jobs, Layoffs, Unemployment Tagged With: food stamps, food stamps for millionaires, Newt Gingrich, self reliance

How Much Is A Trillion Dollars? – U.S. Debt Levels Exceed Comprehension

January 16, 2012 by admin

With little press coverage and no debate by Congress, the U.S. debt level is set to automatically increase by another $1.2 trillion in January.

The most remarkable aspect to the latest huge increase in U.S. debt is the manner in which the debt limit was implemented. As part of last year’s budget agreement, even if Congress decided to vote against the debt increase, the President has the power to issue a veto. In other words, the debt increase is a done deal – no debate, no discussion.

Massive deficit spending by the U.S. government was supposed to stimulate growth and bring us out of recession as it has in previous economic downturns. This time, it’s simply not working and the debt levels have reached a tipping point at which economic growth slows as debt increases.

An impressive body of research covering eight centuries of government debt defaults (“This Time Is Different” by Carmen Reinhart and Kenneth Rogoff) resulted in ominously accurate predictions since its publication in 2009. The collapse of the real estate bubble lead to a collapse of the banking industry which lead to massive government borrowings to bail failed banks and other institutions.

According to Reinhart and Rogoff, a slowdown in the economy leads to further government deficit spending which ultimately puts the solvency of sovereign governments into doubt, which is exactly what’s currently happening across Europe.

Meanwhile, as the U.S. approaches its own tipping point towards insolvency, Americans remain remarkably obliviously to the dangers of mortgaging our future.

How much is a trillion dollars of debt? The number is so large that it is inconceivable for the average American to understand. Deep down, the country has a foreboding of impending disaster from our crushing debt burden, but remains oblivious as to the real extent of the problem.

Here’s a visual to put things into perspective.

One Hundred Dollars $100 – Most counterfeited money denomination in the world.
Keeps the world moving.

One Billion Dollars $1,000,000,000 – You will need some help when robbing the bank.
Now we are getting serious!

One Trillion Dollars $1,000,000,000,000
When the U.S government speaks about a 1.7 trillion deficit – this is the volumes of cash the U.S. Government borrowed in 2010 to run itself.
Keep in mind it is double stacked pallets of $100 million dollars each, full of $100 dollar bills. You are going to need a lot of trucks to freight this around.

If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now…but ~$700 billion- same amount the banks got during bailout.

15 Trillion Dollars – US GDP 2011 & Debt $15,064,816,000,000- The U.S. GDP in 2011. The debt as of Jan 1st, 2012 is 15,170,600,000,000. United States now owes more money than its yearly production (GDP).

Statue of Liberty seems rather worried as United States national debt soon to pass 20% of the entire world’s combined GDP (Gross Domestic Product).

114.5 Trillion Dollars $114,500,000,000,000. – US unfunded liabilities
To the right you can see the pillar of cold hard $100 bills that dwarfs the
WTC & Empire State Building – both at one point world’s tallest buildings.
If you look carefully you can see the Statue of Liberty.

The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government
knows it does not have to fully fund the Medicare, Medicare Prescription Drug Program,
Social Security, Military and civil servant pensions. It is the money USA knows it will not
have to pay all its bills.
If you live in USA this is also your personal credit card bill; you are responsible along with
everyone else to pay this back. The citizens of USA created the U.S. Government to serve
them, this is what the U.S. Government has done while serving The People.

The unfunded liability is calculated on current tax and funding inputs, and future demographic
shifts in US Population.

Note: On the above 114.5T image the size of the base of the money pile is half a trillion, not 1T as on 15T image.
The height is double. This was done to reflect the base of Empire State and WTC more closely.

Filed Under: Banking Industry, Dollars, Government Deficits, Government spending, printing money, Uncategorized

Obama Jobs Plan Bad Joke For Both Employed and Unemployed

September 9, 2011 by admin Leave a Comment

The long awaited and hugely hyped Obama “Jobs Solution Speech”, hastily crafted between rounds of golf on the Vineyard, is unlikely to help either the employed or unemployed.

Obama’s calls his new proposals the “American Jobs Act” but it strongly resembles the $825 billion stimulus spending program of 2009 which was ineffective and failed to stimulate the economy or create new jobs. Taxpayers will likely fail to see the logic of a $447 billion stimulus program working any better than a $825 billion stimulus program.

The latest proposals out of the White House appear to be another desperate Keynesian attempt to keep the economy on life support long enough to boost Obama’s chances in the presidential election race. Expecting voters to buy into Obama’s new program pushes the bounds of credibility. Why would a relatively small $447 billion program work any better than the $4 trillion in deficit financed spending since Obama came into office?

Telling voters that the new half trillion dollar program will be paid for from future mythical budget cuts isn’t likely to fly either after seeing the results of the latest fiasco on deficit reduction talks that lead to a downgrade of the US credit rating.

Half of $447 billion “Jobs Act” program consists of payroll tax cuts for both employers and employees. While probably adding to aggregate spending, the tax cuts do not address the fundamental problems of unemployment and income stagnation over the past decade.

Why Payroll Tax Cuts Won’t Work

What business bases hiring decisions on a 2% drop in the social security (FICA) tax? Any business man stupid enough to decide to hire new employees simply because his share of the FICA tax will be slightly lower is already out of business. New employees are added by businesses when there is added demand for their products and when they are confident that a lasting economic recovery is underway. Today, there is subdued demand and no confidence – a cut in the FICA tax does nothing to change this situation.

Regarding the payroll tax cut for employees, here’s how one Connecticut resident assessed the situation.

“I am currently making $80,600 per year. The recent reduction of 2% in the FICA tax resulted in an increase of $31 per week to my paycheck. Meanwhile, the State of Connecticut just passed the largest tax increase in history, retroactive to the first of the year, which results in paying $17 more per week. My weekly deduction for medical insurance increased by $12 per week since last year and our employer has suspended pay increases.

My net benefit from the FICA tax reduction is $2 a week. Meanwhile, the cost of gasoline, home heating, insurance and groceries has risen at least 6% over the past year. Even if the FICA tax cut was made permanent, an extra $2 per week is certainly not going to motivate me to spend more.

My savings goals for college funding and retirement have been destroyed by a collapsing stock market and zero interest rates on savings. I have to cut current spending in order to meet my savings goals and any extra income would be saved, not spent.”

Did Obama talk to any “real people” outside of the group of Washington elites and millionaire celebrity pals he hangs around with? I think not.

Did Obama talk to any “real businessmen” before coming out with his warmed over and effective stimulus plan? I think not.

Did Obama talk to “Helicopter Bernanke” about how to spread out the $447 billion of borrowed money? The government could simply spend the $447 billion by sending every household in America a check for $3,886 attached with a note telling the recipients to thank their grandchildren whose future has been mortgaged.

Voters are rightfully disgusted by the rapid decline in their standard of living, the debasement of the US currency and the self serving dealings of the ruling Washington elites. To pull out an old campaign slogan, “It’s time for a change”.

There are no easy answers to pulling a debt laden economy out of depression, but increasing transfer payments, small tax cuts, massively increased regulatory burdens, trillions in stimulus spending and zero interest rates have not worked. Maybe the Washington elites should simply step aside, stop micro managing the $14 trillion dollar US economy and allow the creative forces of capitalism to work

Filed Under: Bailout, Confidence, Connecticut, Economy, Government Deficits, Government spending, Jobs, Stimulus Plan, Unemployment Tagged With: Another stimulus plan, consent of the governed, depression, FICA tax, Jobs Act failure, jobs plan, Obama, Obama joke job plan, stimulus, Washington elites

Latest Government Scheme For Growth – The Invisible Tax Cut

September 8, 2010 by admin Leave a Comment

Pulling forward future demand to stimulate economic growth didn’t work with the cash for clunkers program or housing tax credits. Car and home sales collapsed after consumers who were going to buy cars or houses anyways bought today instead of tomorrow. Past stimulus programs have increased government deficits without improving long term economic fundamentals.

Undeterred by previous failures the government is again attempting to pull forward demand, this time with accelerated write offs for new plant and equipment spending.

The new Obama tax break proposals are likely to be even more ineffective than previous stimulus attempts. To “offset” the revenue loss of accelerated deductions, other taxes would be raised, effectively muting the net stimulus that the plan attempts to provide.

NYT – In a speech in Cleveland on Wednesday, Mr. Obama will also make a case for the package of roughly $180 billion in expanded business tax cuts and infrastructure spending disclosed by the White House in bits and pieces over the past few days. He would offset the cost by closing other tax breaks for multinational corporations, oil and gas companies and others.

The “tax cuts” for increased business investment merely accelerate the existing tax write off for business investments that are presently written off over a period of years. If other taxes are raised to “offset” the accelerated tax deductions, the net effect of the plan would be to effectively increase taxes on businesses.

The lure of accelerated tax cuts (which increase cash flow) is not likely to affect decisions on investment spending since corporate America is already sitting on a record amount of cash. Accelerating depreciation deductions will merely pull demand forward from companies that had already planned spending increases for plant and equipment.

Rational consumers and businessmen do not base long term spending decisions on tax deductions. Increased spending by businesses is based on an increase in forecast demand. Consumer spending is ultimately based on confidence in the prospect for increases in future incomes.

For good reasons, neither businesses nor individuals are confident about the future and there is deep skepticism that additional stimulus programs will do little more than increase the government deficit. The latest stimulus plan is conceptually vacuous and likely to decrease public confidence in the government’s ability to formulate a plan for long term economic recovery.

Filed Under: Confidence, Economy, Government Deficits, Government spending, Stimulus Plan Tagged With: Obama's tax cut will raise taxes

Local Governments Join The Strategic Default Movement

August 17, 2010 by admin 2 Comments

As if creditors didn’t have enough worries with nonperforming consumer debt and defaulting real estate mortgages, it now appears that another wave of debt defaults has started – this time by municipal borrowers.

Consider the City of Buena Vista, Virginia, that recently defaulted on a bond payment due July 15th:

WSJ– Buena Vista, Va., borrowed $9.2 million through a bond offering in 2005 to refinance a municipal golf course. It pledged as collateral, of all things, its City Hall and police station.

Now, amid financial difficulties, the city says it can’t pay its debt, triggering a showdown over these public buildings.

On the other side of the battle is a big New York insurance company, ACA Financial Guaranty Corp., which is obligated to pay bondholders if the city defaults.

Municipalities across the U.S. are struggling with huge debts and shrinking revenue, making them vulnerable to similar situations. Harrisburg, the capital of Pennsylvania, is publicly flirting with bankruptcy. And when Central Falls, R.I., couldn’t pay its debt recently, it handed its finances to a receiver.

ACA Financial insured the $9.2 million “moral obligation” bond offering, under which Buena Vista promised to pay the debt if revenues from the golf course were inadequate. The golf course turned out to be a bust, and the City has been losing money every year just to keep it open.

In 2005, at the peak of the lending/real estate bubble, ACA Financial did not foresee a problem with insuring a loan not backed by the full faith and credit of the issuing municipality. This overly optimistic underwriting decision is likely to result in a 90% loss for ACA since the collateral backing the $9.2 million loan is only worth about $1.1 million and the borrower is under no legal obligation to pay (only a “moral obligation”).

The insurer has much to lose. The collateral is worth just a fraction of the debt. The bonds are secured by the golf course itself, but it is valued at just about $950,000, Mr. Kearney says.

The City Hall, part of the collateral, is a small two-story building constructed in the 1960s. Like the newer police station, it is worth just a few hundred thousand dollars, Mr. Kearney guesses, though nobody has bothered to appraise it.

Defaulting on debt has become a rational choice for many debtors. Many defaults are forced due to unemployment, income loss or depleted savings. More challenging for lenders are “strategic defaults” by borrowers who have ability to pay but chose not to, due to loss of collateral value backing the loan.

In the case of Buena Vista, the mayor stated that “No one has been able to give us any solution short of a dramatic tax increase”. Exactly how “dramatic” a tax increase would be required was unmentioned but here are some numbers to consider:

-Under the circumstances, Buena Vista could probably negotiate a reduction in the interest rate to 3% from the current 7.2% and extend the term to 25 years

-Buena Vista has approximately 2,300 families (total population 6,222) and the median household income is $41,900

-The monthly payment on a $9.2 million loan over 25 years at 3% is $43,627

-The payment due from each household to pay off the bond issue would be $18.96 per month, equivalent to foregoing around 3 cups of coffee per month at Starbucks

Is default Buena Vista’s only viable option or have they joined the Strategic Default Club?

Filed Under: Debt Repudiation, Government spending, Risky lending, Strategic Defaults Tagged With: cities join the strategic default bandwagon

US Treasury Calls TARP Repayments A “Milestone” While Ignoring The Elephants In The Room

June 17, 2010 by admin Leave a Comment

Treasury’s Victory Call On Financial Bailout Premature

The Treasury Department’s latest public relations effort to highlight the success of the financial system bailout focuses on the amount of TARP repayments versus total debt outstanding. In addition, the Treasury, which had previously estimated the cost of the TARP program at $341 billion, has now lowered that estimate to only $105 billion.

Wall Street Journal – The U.S. Treasury Department said Friday the total amount repaid to taxpayers for government funds used to bail out U.S. companies has surpassed, for the first time, the amount of outstanding debt.

The Treasury, in its May report to Congress on the Troubled Asset Relief Program, reported TARP repayments reached $194 billion, which has exceeded by $4 billion the total amount of outstanding debt—$190 billion.

Treasury’s assistant secretary for financial stability, Herb Allison, in a statement described the totals as a “milestone” and said this is “further evidence that TARP is achieving its intended objectives: stabilizing our financial system and laying the groundwork for economic recovery.”

Does the general public accept the Treasury’s view that the bailout was a resounding success at a relatively modest cost? Recent Pew Research data, which reveals overwhelming negative public opinion for both the government and the banks, suggests that the Treasury’s spin on the bailout will be given little credence by the public.

Large majorities of Americans say that Congress (65%) and the federal government (65%) are having a negative effect on the way things are going in this country; somewhat fewer, but still a majority (54%), say the same about the agencies and departments of the federal government.

But opinions about the impact of large corporations and banks and other financial institutions are as negative as are views of government. Fully 69% say that banks and financial institutions have a negative effect on the country while 64% see large corporations as having a negative impact.

In March, during the final debate over health care reform, just 26% of Americans offered a favorable assessment of Congress – by far the lowest in a quarter-century of Pew Research Center polling.

Large majorities across partisan lines see elected officials as not careful with the government’s money, influenced by special interest money, overly concerned about their own careers, unwilling to compromise and out of touch with regular Americans.

The skepticism regarding the ability of government to operate honestly in the public’s best interest is well founded and the latest Treasury report on progress of the TARP program bears this out. While the Treasury reports on the “success” of repayments under the $700 billion Troubled Asset Relief Program, other government bailouts and guarantees that are far exceed the cost of the TARP program are conveniently ignored. If the Treasury really wants to provide a comprehensive accounting of what the financial system bailout will cost the American taxpayers, here’s my short list of additional items to address in their next report.

1. The amount currently owed under the TARP program does not include amounts committed by the US Treasury but not paid out. According to the WSJ, “the outstanding debt amount does not include $106.36 billion that has been committed to institutions but has yet to be paid out by the Treasury. Factoring in that amount, the outstanding debt would be roughly $296 billion.”

2. Two of the biggest ongoing bailouts in history go unmentioned. The Housing and Economic Recovery Act of 2008 provided for a $400 billion bailout of Fannie Mae and Freddie Mac. The Government subsequently granted Fannie and Freddie an unlimited line of credit with the Treasury. Fannie and Freddie have already drawn $145 billion and according to Bloomberg, the final cost to bailout out the two agencies could approach $1 trillion.

3. Future banking failures constitute another sizable risk for increasing the cost of bailing out the US financial system. The FDIC has been able to resolve banking failures to date using premiums collected from the banking industry, including a special assessment of $46 billion at the end of 2009. While the FDIC has not yet had to tap its $500 billion line of credit with the US Treasury, future banking failures may require it to do so.

In its latest quarterly report, the FDIC reported an increase in the number of problem banks to 775, out of a total of 7,932 FDIC insured banks. Assets at the problem banks total $431 billion. Total deposits insured by the FDIC now total $5.5 trillion. The amount of reserves in the FDIC Deposit Insurance Fund total negative $20.7 billion. Liquid reserves of the FDIC total a mere $63 billion. If the US economy weakens and more banks fail, the FDIC’s only option will be a costly bailout by the US Treasury.

The government seems to believe they can fool all of the people all of the time. Whatever happened to “change you can believe in”?

Filed Under: Bailout, Banking Industry, Confidence, Corruption, Government spending, Problem banks Tagged With: treasury's report on TARP paybacks omits the biggest bailouts, ultimate cost of financial system bailout?, US Treasury's report on TARP falls short on full disclosure

Mr Obama, Please Don’t Read This

June 10, 2010 by admin Leave a Comment

US Companies Build Massive Cash Reserves Based on Economic Worries

Wall Street Journal – U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery.

The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952.

Idle cash of almost $2 trillion is a massive amount, but let’s put that into perspective by comparing that to the spending habits of the U.S. Government. If the U.S. Government expropriated every dollar of cash held by U.S. companies, it would barely cover 16 months of U.S. deficits. The entire $1.84 trillion of cash held by U.S. companies would pay for a mere 6 months of U.S government spending.

In the government’s last fiscal year, receipts were $2.1 trillion and spending totaled $3.5 trillion for a deficit on $1.415 trillion. Latest figures from the U.S. Treasury indicate that the current fiscal year’s deficit will exceed last year’s deficit – here are the numbers month by month.

FISCAL 2010 RECEIPTS OUTLAYS DEFICIT

$MILLIONS

OCTOBER……………..135,294 311,657 176,363

NOVEMBER…………..133,564 253,851 120,287

DECEMBER…………….218,918 310,628 91,410

JANUARY………………205,240 247,874 42,634

FEBRUARY…………….107,520 328,429 220,909

MARCH……………………153,358 218,745 65,387

APRIL………………………245,260 327,950 82,689

MAY…………………………146,795 282,722 135,927

YEAR TO DATE 1,345,950 2,281,566 935,606

Graphical Representation of Looming Disaster

Government spending is now almost twice total receipts. How long can any entity continue at this pace before hitting an economic brick wall?

Source: Department of the Treasury

Fed Chairman Bernanke recently warned that unless deficits are reduced, the U.S. could become the next Greece, but the economy is currently too fragile to initiate deficit reductions. Translation – we are facing social and economic disaster from out of control deficit spending, but we can’t do anything about it right now. Conclusion – the government will need trillions every year for the foreseeable future to cover the gap between receipts and spending.

Let’s hope the President doesn’t connect the dots here – $trillions needed by the government while companies are sitting on $trillions that they are not investing, spending or paying to shareholders – not very patriotic! After having already proposed a plethora of tax increases on everything possible, “idle corporate cash” could easily become a very tempting target. Let’s hope Mr. Obama does not read this post.

Filed Under: Government Deficits, Government spending, Sovereign Default Tagged With: us companies hold $2 trillion in cash, US spending 169% of receipts

Geithner Lectures Europe On Fiscal Discipline – This Is Like BP Giving A Seminar On Oil Well Safety

June 8, 2010 by admin Leave a Comment

With Europe Facing Meltdown Geithner Offers Advice

After recently “saving” the US from economic Armageddon, Treasury Secretary Geithner must feel uniquely qualified to advise European governments on their looming sovereign debt crisis. Geithner’s solution to Europe’s out of control deficits is additional stimulus (via increased deficit spending), bailouts and stress tests on Europe’s tottering banks to rebuild public confidence in the banking system.

Wall Street Journal – LONDON—U.S. Treasury Secretary Timothy Geithner landed in Europe and reasserted a traditional American role of dispenser of financial advice to the world, telling European governments to get their fiscal houses in order.

After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a new-found willingness to reassert American authority on the future of the world economy.

Inside No. 11 Downing Street, the home of his British counterpart, Mr. Geithner pushed continental Europe to speed up the rescue of debt-laden economies, and to not stint on fiscal stimulus.

The U.S. is also advising European countries that can afford it—the U.K., Germany, France—to keep pumping stimulus into their economies.

“This crisis is multifaceted, but I believe bank stress tests can be helpful as a critical component of any comprehensive plan to restore confidence in the European financial system,” said Lee Sachs, who was, until a month ago, a top adviser to Treasury Secretary Timothy Geithner.

Mr Geithner’s advice that over indebted nations should borrow more money to solve their debt crisis was met with scorn by European officials. The recommended stress tests for banks was viewed as a mere public relations exercise.

WSJ – For Geithner critics, the new U.S. assertiveness is misplaced. Desmond Lachman, a former senior IMF European official who is now a researcher at the American Enterprise Institute, said the repeated bailouts engineered by Mr. Geithner have made the overall problem worse, and that the U.S. advice of providing even more financing for heavily indebted countries like Greece is bound to fail.

Mr. Lachman said Greece’s debt needs to be restructured and that weaker euro-zone countries should consider dropping the euro and reverting to their national currencies. “Geithner is part of the problem,” he said. “It’s obvious this can’t work.”

“You don’t need a stress test to tell you what would happen if Spain became bankrupt; it would be horrible,” one German official said. German officials argue the U.S. tests were little more than public-relations stunts, designed so that banks would pass.

European governments realize that the American solution of borrowing trillions for bailouts and fiscal stimulus has only compounded the original problem of too much debt. US Government debt now exceeds $13 trillion and the debt to GDP ratio of the US equals or exceeds that of many European nations that are now tottering on the fiscal abyss. Based on continued unprecedented expansion of the national debt, the IMF is forecasting that total US debt will exceed GDP by 2012. Debt to GDP ratios over 100% raise serious questions about a country’s ability to service their debt, especially if interest rates rise.

Tragically, Europe has bought into the “Geithner solution”. Despite their doubts and with no other easy options, Europe will lend up to $1 trillion to bailout hopelessly over indebted sovereign borrowers. Does anyone really believe that this latest bailout is a solution?

Filed Under: Bailout, Geithner, Government spending Tagged With: Geithner tells europe to cure debt problem with more debt

Why The Biggest Risk To The Economy Is A Strong Recovery

January 12, 2010 by admin 2 Comments

Concerns about the current economic mess turning into another Great Depression seem to have faded. The consensus view of government officials and private economists seems to be that the economy, although still fragile, is well on its way to a robust recovery. According to Bloomberg,

Companies in the U.S. expanded in December at the fastest pace in almost four years, signaling the economic recovery is gaining speed heading into 2010.

The Institute for Supply Management-Chicago Inc. said today its barometer rose to 60, exceeding the most optimistic estimate of economists surveyed byBloomberg News and the highest level since January 2006. The gauge, in which readings greater than 50 signal expansion, showed companies boosted production and employment as orders climbed.

Stimulus programs and discounting have propelled a rebound in global sales that is reducing stockpiles, which may spur manufacturers to further increase production in coming months.

The world’s largest economy expanded at a 2.2 percent pace from July through September after a yearlong contraction that was the worst since the 1930s, figures from the Commerce Department showed last week. Economists surveyed byBloomberg forecast growth to pick up to a 3 percent pace in the fourth quarter and average 2.6 percent for all of 2010.

Predictions for a strong economic recovery seem to grow by the hour. Recent articles in the press lead one to believe that – unemployment has bottomed, the growth of foreign economies will result in greater demand for U.S. goods and services, inflation will remain subdued, the dollar has stabilized, a recovery in the housing market has started, mortgage rates will remain low, the bailed out banks are in full recovery mode, the Fed will gradually remove excess liquidity from the system, the politicians will get the deficit under control and the stock market will continue to post impressive gains.

Is the bullish consensus getting out of hand or will there be a few surprises on the path to a booming economy? One scenario that could shatter the dreams of the bulls is if private individuals and businesses are crowded out of the debt markets by a U.S. government that needs to borrow seemingly endless trillions of dollars. The latest data on private and governmental borrowing from the St Louis Federal Reserve show that crowding out could slam the brakes on an economic recovery. Businesses and individuals may be unable to borrow in strained capital markets or face much higher borrowing costs as they compete with the government for capital.

Lending by large commercial banks has plunged, a combination of tougher lending standards and reduced loan demand. Any economic recovery would result in increased loan demand by the private sector which strained capital markets may not be able to supply. Competition for funds could lead to a spike in interest rates.

As lending to the private sector has collapsed, government borrowing has exploded.

With no end in sight to new trillion dollar programs being passed by Congress, the financing needs of the U.S. Government are not likely to be reduced any time soon. The recovery of the U.S. economy that many foresee may come to a grinding halt if private sector borrowers are crowded out of the capital markets.

Filed Under: Crowding Out, Economy, Government spending, Interest Rates, Risky lending Tagged With: Crowding out may kill recovery, Economic Boom without lending?, Strong economy - not so fast!