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Tuesday, March 30, 2010

The Next Crisis Is Already Here

Social Security System is out of money!

This year, the money paid out of the Social Security system will exceed the money paid into the system. There are two fundamental problems here. 1)The the account that was set up for the yearly surplus, that has occurred every year since the system was set up in the 1930's, is empty because Congress has raided it over the years. It was an easy piggy bank to raid. 2) The 15 million Americans unemployed today are not paying into the fund and 15 million more under employed are making reduced payments.

Remember that the solution is simply and powerful. Just remove the cap on SS payments into the fund. You can prove this for yourself. Look up the distribution of incomes in the U.S. (That is easy.) Then count and estimate the number of individuals with incomes greater than $106,800. Estimate the median point in that income distribution. Multiply the median point in dollars by the number of individuals with incomes greater than $106,800. Multiply that huge number by 6.2% (the SS tax rate).
Then double that for the employer's contribution.

Be ready. You are now dealing with a huge, huge number. You are also looking at the end of the Social Security fund problem.....Forever!!

The change can be implemented over a number of years to ease its impact.

Now watch for the first politician to propose this simple solution. And be very afraid of all the half ass proposals that will be proposed to solve the problem.

Monday, March 29, 2010

I Am Not The Only One

With health bill, Obama has sown the seeds of a budget crisis

By Robert J. Samuelson
Monday, March 29, 2010; A19

When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody's Investors Service -- the bond rating agency -- published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama's health-care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.

Should the United States someday suffer a budget crisis, it will be hard not to conclude that Obama and his allies sowed the seeds, because they ignored conspicuous warnings. A further irony will not escape historians. For two years, Obama and members of Congress have angrily blamed the shortsightedness and selfishness of bankers and rating agencies for causing the recent financial crisis. The president and his supporters, historians will note, were equally shortsighted and self-centered -- though their quest was for political glory, not financial gain.

Let's be clear. A "budget crisis" is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt -- the accumulation of past deficits -- spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.

Greece is experiencing such a crisis. Until recently, conventional wisdom held that only developing countries -- managed ineptly -- were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.

Two weeks before the House vote, the Congressional Budget Office released its estimate of Obama's budget, including its health-care program. From 2011 to 2020, the cumulative deficit is almost $10 trillion. Adding 2009 and 2010, the total rises to $12.7 trillion. In 2020, the projected annual deficit is $1.25 trillion, equal to 5.6 percent of the economy (gross domestic product). That assumes economic recovery, with unemployment at 5 percent. Spending is almost 30 percent higher than taxes. Total debt held by the public rises from 40 percent of GDP in 2008 to 90 percent in 2020, close to its post-World War II peak.

To criticisms, Obama supporters make two arguments. First, the CBO says the plan reduces the deficit by $143 billion over a decade. Second, the legislation contains measures (an expert panel to curb Medicare spending, emphasis on "comparative effectiveness research") to control health spending. These rejoinders are self-serving and unconvincing.

Suppose the CBO estimate is correct. So? The $143 billion saving is about 1 percent of the projected $12.7 trillion deficit from 2009 to 2020. If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits -- not finance new spending. Obama's behavior resembles a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it. It's self-indulgent and reckless.

But the CBO estimate is misleading, because it must embody the law's many unrealistic assumptions and gimmicks. Benefits are phased in "so that the first 10 years of [higher] revenue would be used to pay for only six years of spending" increases, a former CBO director, Douglas Holtz-Eakin, wrote in the New York Times on March 20. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there's the "doc fix" -- higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.

Proposals to control health spending face restrictions that virtually ensure failure. Consider the "Independent Payment Advisory Board" aimed at Medicare. "The Board is prohibited from submitting proposals that would ration care, increase revenues or change benefits, eligibility or Medicare beneficiary cost sharing," says a summary by the Henry J. Kaiser Family Foundation. What's left? Similarly, findings from "comparative effectiveness research" -- intended to identify ineffective care -- "may not be construed as mandates, guidelines or recommendations for payment, coverage or treatment." What's the point then?

So Obama is flirting with a future budget crisis. Moody's emphasizes two warning signs: rising debt and loss of confidence that government will deal with it. Obama fulfills both. The parallels with the recent financial crisis are striking. Bankers and rating agencies engaged in wishful thinking to rationalize self-interest. Obama does the same. No one can tell when or whether a crisis will come. There is no magic tipping point. But Obama is raising the chances.

Sunday, March 28, 2010

Two Thousand Four Hundred Pages

Yes, that is how many pages are in that monstrosity called the Healthcare Reform Bill. And there is not a single dollar devoted to reducing our incredibly wasteful health care expenditures.

We spend twice the amount on medical care of any other developed country, and we still get lousy outcomes.

I have already pointed out that our infant mortality rate is right up there with third world countries. But it isn't just babies who are dying, their mothers are also dying.

In 1990, in the U.S., 6.6 women died for every 100,000 pregnancies. In the past twenty years, in spite of rapidly increasing medical expenditures, the morality rate among mothers has more than doubled. Last year it was 13.3 women.

Forty other countries have lower rates than we do. Even in Britain, with its much criticized National Health Services, the rate is below 4.0.

Saturday, March 27, 2010

Get Ready For The Big Bang

Today, 11 Million households are underwater with their mortgages. Fully half of them also have second and/or third mortgages. Almost all of those first, second and third mortgages are adjustable rate mortgages and will start being reset in the very near future. It seems unavoidable that we are going to see a huge number of home owners walking away from their homes. That will bring huge losses for the banks and more blighted neighborhoods. It will also increase the housing inventory for sale and further depress the home building industry.

The problem is that none of the modification plans currently in use can consider second and third mortgages so they do not really take into account all of the expenses of the household they are trying to modify. That is one of the biggest reasons that most modification plans fail.

All this could be avoided if bankruptcy court judges were allowed to modify mortgages because the judges can consider all of the household expenses and all of the income. A bill to allow exactly this behavior was introduced in the Congress last year. (See an earlier post.) Sorry to say, the Wall Street banking lobby killed that bill before it even got out of committee.

So here is the take away from the last few years;

*Wall Street Banks created phony financial "innovations" that did absolutely nothing beyond making Wall Street Bankers disgustingly rich.
*Almost all of the Wall Street Bankers who caused the Great Recession Conspiracy are still in their jobs.
*Wall Street Bankers have killed every single attempt to increase regulation of Wall Street Banks.
*Everything is in place for the next Great Recession Conspiracy to occur. Nothing has changed except that you are measurably poorer and Wall Street Bankers are obscenely richer.
*But before we get there we have to get out of this recession and the U.S. Government is doing nothing to solve that problem.

Friday, March 26, 2010

Here Is Where We Are Now

Approximately 30 Million Americans are either unemployed, under-employed, or have given up looking for work. That equals roughly one fifth of the entire work force.

These people, and others who are worried about losing their jobs, are cutting back on their expenditures. Consumer expenditures usually account for 70% of the Gross Domestic Product. Two of our long time favorite restaurants have closed. It is a tough time to be in the restaurant business, or any other small business.

Large corporations are sitting on huge cash reserves. They don't need to borrow from anyone. Productivity is at an all time high because they have reduced employment and maintained production with a reduced work force.

Small businesses are teetering on bankruptcy, or simply shutting down. A survey earlier in March indicated the 80% of all small businesses think they will be out of business within nine months if orders don't improve. The other 20% say they will be out of business sooner.

Eleven million U.S. households are currently under water with their mortgages. That means that if they lose their jobs they can't move to find a new job.

The little bump in GDP lately was solely the result of replacing inventories which were run down during the worst of the recession. Without new sales, the GDP will return to shrinking.

The Federal Reserve Bank has flooded the economy with money. It won't take much to set of raging inflation.

The administration is shouting that the Recession is over. Don't believe it for a minute.

Thursday, March 25, 2010

It Gets Worse!!

Yes, 32 million Americans will have healthcare 2019!! Yes, the big deal bill that provides every American with healthcare insurance will do it, but not for NINE years.

Anybody else smell fraud here??

Wednesday, March 24, 2010

Garbage In, Garbage Out

That cliche from computer programming pretty well applies to the HealthCare bill that Obama and democrats are so joyously celebrating.

I said before that when Obama gave the problem to Nancy and Harry, he could expect trouble, and that is what he got, no matter how much lipstick he tries to put on that pig. I can find only one, so far, thing that the bill does that is good. It will stop insurance companies from canceling your insurance policy if you get sick.

Other than that, everything else of any value is kicked down the road to 2014 or 2018. What a bunch of crap!!

Nevertheless, that is not the big problem with the so-called HealthCare bill. It does absolutely NOTHING to reduce the cost of healthcare in the U.S. Right now, we spend 16%-18% of our Gross Domestic Product on health care. That is at least twice as much as any other developed country in the world spends. And our expenditures are on the way to 25%? 30%? in a few more years. That is money that cannot be spent on education, roads, national defense, etc. etc.

But the worst part of all is that we get lousy results from spending all that money. Our infant mortality rate looks like a third world country. Male and female life spans are significantly shorter than Europeans. The list goes on. If you have a problem with cancer, the U.S. is good place to be, but if you have any other complaint, you really have a big problem.

So now we have this garbage can approach to healthcare reform, and all the wise heads say it will be a generation before the subject is ever approached again. Too bad for us.

Saturday, March 13, 2010

Chained Consumer Price Index C-CPI

Economic theory is once again threatening your financial health. It is called Chained Consumer Price Indexing and it is stupid beyond belief. The economists behind it are trying to reduce the effects of inflation on your income. Without any evidence whatsoever, they propose that inflation doesn't really affect people very much because when confronted with increasing prices, consumers simply trade down to some cheaper substitute. When asked why they don't bother to find out what people actually do, they say it would be too much trouble and cost too much.

They say that when consumers find that steak house prices are higher than they used to be, they go to McDonald's instead. That is incredibly stupid and uninformed. Researchers who study how consumers actually behave tell a completely different story.

Here is what consumers actually do when confronted with rising prices. Let's use eating at a steak house restaurant for demonstration purposes.

81% make an effort to find a less expensive version of the steak house they usually frequent.

73% just eat out less often, but at the same restaurant.

49% search for a lower quality steak house (Mickey D?).

You might think that this has nothing to do with you, but you would be wrong. Check to find out how much of your income is indexed to the CPI.

The wack job economists are at again with their no evidence theories that actually hurt people.

Thursday, March 11, 2010

Income Distribution in the U.S.-The Real Problem.

Today's Los Angeles Times highlights the most important problem facing the United States, although it appears in two separate columns. The first column highlights the unemployment rate in California. Unemployment reached 20% in eight counties. Add in Florida, Georgia, North and South Carolina where unemployment is the highest since 1976 when the government started keeping records. Unemployment in the U.S. is extraordinarily high and persistent.

The other column points out that in 2009 there were 7.8 Million households with net worth in excess of $1 Million (excluding homes) up 16% since last year. Of that group, 980,000 households had net worths in excess of $5 Million, up 17%. Another 12.7 Million households had a net worth in excess of $500,000, up 12%. So clearly, the rich are simply getting richer.

So aproximately 20,000,000 households (different data source)paid no more than $6,621.60 in Social Security taxes. That is the amount any household with an income of $106,800 paid. Employers matched that amount, for a total contribution of about $13,000.

So let's do a little math. To make things simple, assume every household with incomes up to $1 Million paid about $117,000 more annually ($13,000 X 9). That alone contributes roughly $2.3 Trillion every year. If the cap were lifted completely, it would raise something in area of $3-4 Trillion!

End of Social Security scare! It also pays for healthcare for everybody!

Such a simple solution and not a single politician has enough guts to suggest it.

And I don't think we have to worry all that much about the richie riches. They are doing just fine.

Wednesday, March 10, 2010

The Washington Post Comes To The Same Conclusion

The road to America's economic recovery starts in L.A.
By Harold Meyerson
Wednesday, March 10, 2010

A life spent stranded in Los Angeles traffic can nonetheless yield its epiphanies. One such moment came in November 2008, when L.A. County's beleaguered commuters voted to increase their sales tax by half a cent over the next 30 years to build an electric rail system that could speed their journeys and clean their air.

Now, Los Angeles is asking Washington for loans -- not grants, mind you -- to be repaid with that sales tax revenue, to accelerate said construction so that it can be done in one decade rather than three. In other words, to help finance a major environmental and stimulus program that won't add to the federal deficit. It's an idea so novel that Washington's initial reaction was befuddlement.

L.A. voters are as tax-averse as anyone, and the initiative that a whopping 68 percent of them supported followed the model for successful Golden State ballot measures: It left little to the discretion of elected officials. It stipulated where the rail lines would begin and end, which bus lines would be added, which roads would be widened. By generating roughly $40 billion over three decades, it would double the L.A. rail system -- a prospect so pleasing to all manner of Angelenos that Measure R was sponsored by the local chambers of commerce as well as unions and environmental groups.

"People will vote for a tax increase if it has a clear purpose they support, and if it's locally controlled," says Mayor Antonio Villaraigosa, the measure's chief sponsor. "But when you spread out the construction over 30 years, voters will begin to wonder, 'What happened to my sales tax money?' "

If the work could be accomplished in 10 years, as the mayor now proposes, it would engender more than 150,000 construction jobs smack in the part of the country that is home to more unemployed construction workers than any other. It would also save nearly $4 billion by avoiding the presumably higher costs of labor and materials in, say, 2030.

What Los Angeles needs are bonds and loans to provide now the funds that it would repay with its sales tax revenue over time. Investment banks are likely to put up some of the money, but the city has found it necessary to seek a guarantee from Washington as well.

The feds, however, are accustomed to spending, not lending, their money. When Los Angeles initially sought not an appropriation but a loan, nobody in Washington knew how to respond. "They laughed," says Villaraigosa. "They said they didn't have a program that could do this."

Some joke. The nation's roads, rails and schools are collapsing; unemployment is projected to remain painfully high for the next decade; last year's stimulus package has not generated jobs on a scale commensurate with the crisis -- and along comes a voter-mandated, job-generating, environmentally beneficial project in the nation's largest county that won't ultimately cost Washington money. And the feds don't know how to respond.

At bottom, the problem is that we don't have much in the way of institutions of public finance. Rep. Rosa DeLauro, a Connecticut Democrat, has been trying to establish a national infrastructure bank since 1994. With $25 billion in public funds, such a bank could leverage far greater amounts in loans for badly needed construction projects. DeLauro's current bill is backed by labor, the U.S. Chamber of Commerce and the bipartisan National Governors Association. But it lacks Republican co-sponsors, and there is no provision for the bank in President Obama's current budget. Thus does the Beltway's political gridlock worsen traffic gridlock elsewhere in the land.

Still, as Angelenos have continued to press their case, some congressional committee chairmen are warming to the cause. Alterations to some federal Build America bond guarantees are under consideration. Some of the Transportation Department's acronym-laden programs may in fact allow for secure loans. However inadequate our funding mechanisms might be, reducing joblessness, improving our infrastructure and cleaning our air, at no net cost to the federal government, does hold a certain appeal.

"We come with money in hand," says Villaraigosa. "And this could be a template for the rest of the nation."

Indeed, if the federal government could do this for Los Angeles, it could do this for other cities and counties whose voters have decided to tax themselves. Without adding to the deficit, town by town, it could rebuild a crumbling nation.

This is exactly what we recommended in our book, The Great Recession Conspiracy.

Tuesday, March 9, 2010

King Canute Tries Again

March 7, 2010

David Axelrod
Senior White House Advisor
The White House
1600 Pennsylvania Avenue NW
Washington DC 20050

Dear Mr. Axelrod

In today’s New York Times, you are quoted as asking, “Why haven’t we broken though?” I would like to try to answer that question, but first a couple of points need to be clear.

One; I have been an ardent Obama supporter since the day he stood on the court house steps and declared his candidacy. I attended meetings, held up a sign (and met him in San Diego), telephoned voters in Texas, South Dakota, California, contributed almost every month, and spent election day driving little old ladies to vote. You can see I have a large vested interest in seeing him succeed.

Two; The President has made some brilliant appointments that are producing great results. Hilary Clinton, George Mitchell and Richard Holbrooke have changed the way the world looks at us. Robert Gates is showing a real determination to get Defense expenditures under control. Janet Napolitano was a perfect choice for that monstrosity, Home Land Defense. Kathleen Sebelius, Ray LaHood and Eric Shinseki are all inspired appointments who seem to be doing a great job.

My personal favorite is Arne Duncan, the first human being to stick a finger in the eye of the teacher’s union.

So the first, easy answer to your question is that the successes noted above have not received the credit they deserve. But for the larger, much more important question, the answer is different.

Firstly, the economy of the U.S. is in dire straits. Fifteen million Americans are unemployed. A record number have been unemployed for over six months. Another fifteen million are working short hours, or have simply given up looking. You know the numbers, 70% of the GDP is driven by consumer expenditures and ordinary Americans are not spending beyond absolute necessities because they don’t have incomes or are scared they will lose theirs. In addition, American households have to rebuild their finances after the Wall Street bankers “stole” them.

So the President’s first job has to be putting Americans back to work so they have paychecks to spend. He keeps saying jobs are job one, but what is actually coming out of the administration is utterly useless. The big deal that came out of Washington last week is so completely foolish that it would be laughable except that it is so serious.

The set piece of the jobs bill is a credit, to small businesses that make new hires, on their Social Security obligations. After forty years experience as an owner, principal and consultant to a wide variety of small businesses, I can guarantee you that no small business will ever hire a new employee to get a tax break. They will hire new employees when their order books are full. Ask your self, “Did AKP&D ever hire a new employee to get a tax break?”

A real cynic might ask whether the jobs bill was simply meant to create the appearance of doing something without spending any money.

So the first important answer to your question is a question, “Why would the President support such a nonsensical approach to the jobs problem?” And the answer is that he is getting truly bad advice. Larry Summers is on record more that once with the belief that people are unemployed because they don’t want to work. You can dispel that particular piece of Nobel Prize crap by taking a walk down to the local unemployment office and asking the people there if they want to work! You will get a very clear answer.

So what should be happening? You can find a very clear presentation of the appropriate policies that the government should be following in our new book, “The Great Recession Conspiracy”. David Zetland (PhD-University of California) and I (DBA-University of Southern California) have explained that there are five hundred years of repeated economic behavior that should be the basis for all government economic policy. You can find our book at It is also available as a Kindle book. If you send me an email address, I will send you a digital copy.

Section Two explains exactly what government policies should be and why they should be that way.

The second part of the answer to your question involves healthcare. And it is difficult to imagine a government program more botched than healthcare to date.

First of all, we all agree that healthcare costs are more than double any other developed country, that they are growing rapidly, and in the foreseeable future could bankrupt the country. Accordingly, the first actions should have centered on reducing those costs, and there are at least four easy to understand programs that would accomplish exactly that. Here they are;

*End of life expenditures; The numbers vary according to what is being counted but 60%, 70%, 80% or 90% of healthcare costs are spent on the last two weeks, two months, or two years of life. We can markedly reduce that cost with some simple actions; encourage living wills, DNR requests, and calm discussions with doctors (Sarah Palin’s death panels are simply irresponsible diatribe). This is a low cost action with huge cost savings potential.

*Simple hospital wide actions to reduce infections; Research has demonstrated that actions as simple as doctors and nurses washing their hands before and after seeing a patient can make huge reductions in infections and deaths. Related to this is the evidence that in-hospital costs can be markedly reduced by getting everyone to follow a check list for every procedure so that the same task is performed the same way by every one involved. These programs are also very low cost with huge cost savings potential.

*Digitizing medial records; If we could speed this program, we could save huge amounts of money. Why should the same procedure at the Mayo Clinic cost $100,000 but $200,000 at UCLA Medical Center? Peter Orszag is doing some brilliant work here and it needs to be expanded and speeded up. Again, we could get great savings at a relatively small cost.

*Tort reform; While the evidence here is weaker than the three programs above, there is still some evidence that a cap on awards could reduce healthcare costs. And once more, significant healthcare cost savings can be achieved at a modest cost.

Controlling healthcare costs and Social Security costs are discussed in detail in Section Four of our book.

If the President had actually backed these four, relatively simple, cost savings programs first, he would have considerable leverage in getting the healthcare program he really wanted because he could have shown how he intended to pay for it.

The second part of the healthcare mistake was to give the job to the two people who lead the two organizations that Americans rate just below used car salesmen. The President should have advanced his own program, but he failed to do that until just now, when it is really too late for this session of Congress. The truth is that healthcare has been so botched that the great majority of Americans do not support anything that is in Congress now.

So here you have the answer to your question. It is not too late to salvage the economy and healthcare yet, but time is running out fast.

As long as I am at it, let me bring up one more point that keeps the administration’s message, whatever it is, from registering with most Americans. One day, Wall Street bankers are “fat cats” and two weeks later the same crooks are “savvy businessmen”. That one particularly irritates me.

Very truly yours,

Wednesday, March 3, 2010

Jim Bunning's Point

No matter what you think of Senator Jim Bunning, he has a valid point. The Senate was getting ready to pass one of those "catch all" bills they specialize in to put money in the pockets of their favorite supporters. The price tag for this bill was $10 Billion.

Bunning's point was that the Senate should find some way to pay for this bill instead of simply borrowing more money and increasing the federal government's debt. That sure makes sense to me!!

However, the other 99 senators did not see it that way, and hounded and berated Bunning until he gave up his hold on the bill.

So the vital question for the future of the United States is simply this, "If not now, then when?".

Tuesday, March 2, 2010

You Had Better Get Ready!!

Today, the management consulting firm, George S. May Company, released a research study of small businesses in the United States. They found that 80% of all U.S. small businesses believe they will fail in the next nine months unless their order books improve markedly. The other twenty percent said they will fail sooner!!

You can read earlier posts to understand just how important small businesses are to the U.S. economy and the creation of new jobs.

Today, thirty million Americans are unemployed, working short hours or have given up looking for work. More people have been unemployed for over six months than any other period in our history.

When small businesses start failing in large numbers, unemployment will skyrocket! That is when the Great Recession will really begin. Read Section Three of The Great Recession Conspiracy to learn how to best protect yourself. You can find out how to get the book in earlier posts.

You Simply Could Not Make Up This Stuff

Now follow the bouncing ball here.
1) The government of Greece is teetering on bankruptcy because they continually spend more money than they have.
2) Greece's financial troubles could conceivably end the European Union (EU).
3) Goldman Sachs invented special financial instruments that helped Greece hide its pending bankruptcy from the world.
4) Goldman Sachs then bought other financial instruments that bet that Greece would go bankrupt.
5) The Greek Secretary of the Treasury is a former Goldman Sachs banker.

Not content to bankrupt the U.S., Goldman Sachs is now bent on bankrupting the world! And we are paying them $ Billions to do it!

And Obama thinks these are just "savvy businessmen".