Rebane's Ruminations

Of Horsepower and Deficits

George Rebane

P.J. O’Rourke wrote a wonderful reprise of America’s love affair with the automobile in yesterday’s (30may09) WSJ – ‘The End of Our Affair’.  The WSJ and our local Union are our morning papers that get us through breakfast in the comfortable, old-fashioned format.  Jo Ann and I divvy up the various sections of the two papers, read, trade sections, and gab about what we’re reading.  Mostly what we focus on are the in-depth pieces, features, commentaries, and editorials.  By morning, the news in pulp publications is old hat; we already got that online last night, and woke up to NPR’s version of the world.  So, as the old song says, ‘everything’s up to date in Kansas City’ by the time we’re eating cereal.

But, as I got about five inches into O’Rourke’s piece, a stable part of my world suffered a sudden jolt, and when the dust settled, it had a new crack in.  PJ had blown it, and blown badly the explanation of horsepower, the notion that was central to his exposition of the American psyche and our love affair with cars.  I mean, it wasn’t a slip of a word or two - he went on and on, telling those who knew what he didn’t.

Now to me PJ has always been the street-smart, self-effacing, humor wordsmith who underneath was obviously a well-read intellectual.  He could deliver up arcane issues and topics in a secret sauce that made you laugh and at the same time say, ‘Sumbich, I didn’t know that.’  But yesterday he exposed a part that I (and, perhaps, many others) didn’t want exposed, and now we need to recalibrate the man.

Again We Lead

George Rebane

Harbingers of the coming wave of city bankruptcies just keep popping up.  No one will have an excuse when we all march into the sunset merrily singing ‘On the Way to Vallejo’.  A recent three-way email exchange with two local leading and knowledgeable citizens – who prefer to remain nameless – started with highlighting the recent WSJ article ‘California Cities Face Bankruptcy Curbs’, and concluded with an informative paragraph on Chapter 9 that covers how municipalities go bankrupt.

In the exchange, my reaction to the WSJ piece was –

When I read this last night (all this stuff comes online first), Jo Ann and I had a good laugh.  This is like passing a law saying you can’t die until you get permission from the county coroner.  It doesn’t really matter who gives you permission or not; if you can’t make your payments, you’re broke whether they give you a good housekeeping seal of bankruptcy or not.  A timely declaration of bankruptcy could at least allow you to dispose of, or protect assets in an orderly manner.  Only from the mind of government.

The exchange concluded with the following explanation from one of the correspondents (reformatted for readability).

US Declares Bankruptcy (updated)

George Rebane

What’s good for General Motors is good for America.  That was ground truth for decades.  And it may still be, now that GM is preparing to announce that it has, with a nudge from the feds, entered Chapter 11 proceedings.  Let’s think this out.

America is broke, it can’t meet its financial obligations without playing Ponzi (or should it now be called Madoff) with all holders of our national debt, and all dependents of future national payoffs.  Today’s young people who faithfully pay into Social Security and other “trust funds” don’t have a prayer of being able to get back any semblance of the buying power that they're putting in.  But we don’t have to tell them that, and better yet, they don’t seem to mind being ignorant of it.

But consider the benefits of the US following the ‘too big to fail’ GM into bankruptcy.  If GM is too big to fail, isn’t Uncle Sam?  In a stroke of the pen we could get rid of over $11 trillion (lots of zeros no one counts any more) worth of national debt, and over $80 trillion of promised payouts under all kinds of programs that the Sierra Bravos (that’s NATO alphabet for ‘sleaze bags’ for new RR readers) of Congress put in place.  We’d be clean – out of debt and ready to face the world in a totally “reorganized” manner.

Reorganize?  Well that’s what Chapter 11 is supposed to have the bankrupt entity do, so it can continue carrying on with its business.  I know, the lawyers among you are shouting that governments don’t do Chapter 11, they do Chapter 9.  OK, so let’s do a federal Chapter 9 – cities across the country will soon be doing it, followed by states that don’t get federalized first (see here).  And take a look at Chapter 9, it’s a short read.

California Dreaming

George Rebane

This morning’s Union contained a letter that I label Exhibit A as to why California is in its current sad state and continues on its current path.  The letter by Patricia Black demonstrates that there is a (large) contingent of Californians who neither recognize nor acknowledge the state’s dire straits.  And any problems the state may have, according to Ms Black, may be solved by raising taxes further on corporations doing business in the state.  Lest we be overly astonished, Ms Black clearly represents the majority view that perennially populates and energizes our legislature in Sacramento with politicians who not only got us here, but tirelessly work to keep us going in the same direction.

In the meantime, the tea parties continue.  Nevada County has an active chapter of the Tea Party Patriots which just issued a press release (here) the top part of which is shown below.

Just so you can see a more coherent liberal view of how California got into its financial woes, please take a look at today’s Washington Post op-ed by Harold Meyerson.  He cites the well-worn litany of 'Prop 13 et. al. made us do it' by limiting state government’s taxing ability to pay for all the absolutely indispensible spending programs that we have been adding on since the 1980s.  This short piece is well worth reading because it again illuminates the mindset that the growth of government and spending is inevitable (and good), and that the proper way out of all subsequent fiscal difficulties is to raise taxes.

Hat tip to one of my Washington area spies for the heads up on this.  

What Tax Burden?

George Rebane

Dan Walters of the SacBee has a puzzle – ‘Are California taxes too high or too low?’ – that seems to vex him, and apparently a bunch of his readers.  He concludes that since during the recession we are earning less, we are paying less taxes, and therefore our “tax burden” is actually lower since the state is taking fewer of our dollars.  Before we all start dancing in the streets, maybe we should mull it over a bit.

I guess a good place to start is with how do taxes burden us.  Well, the simple and correct answer is that if we don’t get to buy what we want or need with our earnings, after the government takes part of it away in taxes, then it’s a burden to us.  However, if our after tax earnings are still enough to accomplish our plans – why we worked to get the money in the first place – then the taxes are not burdensome.  To be sure, we’d still like to keep our loot, but the amount we pay is not really burdensome.  Burden, after all, still means a load ranging from uncomfortable to unbearable.

Ruminations – 26may2009 (updated)

George Rebane

Obama, other than making good on his promise to change the country into a European socialist basket case (which he didn’t spell out for us), his other promises have proven to be a disappointment, and most intensely so to his own ilk.  The casual observer will point out that, at least, he’s more respected on the international scene than was W.  But that overlooks his steady stream of foreign policy failures and snubs – where I think he’s batting a thousand.  More and more the nation’s First Community Organizer cum President is discovering that there are compelling reasons why things were as he found them in January.  Busted promises aside, feeling good about your own press clippings is a shallow reward.  If you’re seen as an easy roll on the international scene, of course you’ll be lauded as a great leader.  Who in their right mind would then want to tick (spelled with a ‘p’) you off, so that you might start standing up for your country?

Jeff Ackerman’s column in today’s Union deserves a great big AMEN!  I had a chance to talk to Jeff before last Wednesday’s State of Nevada County luncheon (RR post here), and Jeff’s thinking on the matter of state finances, taxes, and governance did not come as a surprise.  It’s refreshing to have your home town newspaper’s publisher/editor tell people clearly where he stands on issues instead of peddling reader-numbing, middle-of-the-road mush.  Someone once reminded me that the only thing of use you will find in the middle of the road is a yellow stripe.

[update] ERC issued a press release on how Nevada County businesses and agencies can get at their fair share of stimulation from ARRA (American Recovery and Reinvestment Act).  The short but informative press release can be downloaded here.  BTW, it really doesn't involve any REinvestment since the government is broke, didn't invest anything in the first place, and is paying for this with freshly printed bills.  But these'll work just as well as the old ones, as long as you don't dilly-dally too long in spending them.   

Fiscal Disaster Calculator

George Rebane

The politicians are betting their jobs and benefits-for-life that you won’t give a big rat’s asset about the information in this post.  To let you do the arithmetic yourself, I’ve put together a little spreadsheet that lets you play with the national numbers.  The whole thing is supposed to scare the you-know-what out of you, but I’m not sure that it will work.  It seems that up until now, we Americans have been made of sterner stuff.  Our usual response to this information is to get back to ‘American Idol’.  And when the spray comes off the fan, we claim that we weren’t told, and demand federal bailouts.  The politicians know our ability to process this stuff and our attention span - that's how they survive.

The downloadable spreadsheet ‘Fiscal Disaster Calculator’ is super simple, and about the easiest way for anyone interested to see what the effects of GDP growth rates, aggregate tax rates, and (get this, “risk free”) interest rates are on the approaching economic whirlwind.  If you decide this stuff is too dense for you, at least go stock up on your emergency food, meds, batteries, disaster radios, guns, and grenades.  And then again, you may just put in numbers that paint a future of sweetness and light.

In Memoriam and Eternal Gratitude

George Rebane

 

Since you gave all,
    the world was spared and we have reached for stars.
Since you gave all,
    some have not learned, and now apologize for wars.
Since you gave all,
    there still are those who hold with honor no one mars.
Since you gave all,
    we will rebuild America, for children ours and yours.
Since you gave all.

Debt Monetization – How Nice

George Rebane

You hear a lot about this today, and almost no one understands it.  According to the sociologists and educators who study what the electorate comprehends, ‘debt monetization’ means about as much to the average voter as the explanation of a freshly painted corral post does to a cow.  And here Wikipedia is of less than no help –

Debt monetization occurs when a nation's central bank (for example, the Federal Reserve in the United States) "buys" government bonds.  If a government's expenses exceed its tax revenue, if nothing is done the government will draw resources (capital) out of the private market. Since there is a limited amount of capital available in the market, there will be less available to fund business growth if the government takes out a substantial portion. If the debt is monetized, the capital is thereby returned to the private market. (emphasis mine)

This tells us that if the Fed buys Treasuries, then “capital is thereby returned to the private market”.  Well, no.

First of all, the Fed doesn’t keep wads of cash on hand.  Its assets consist of other securities that it has ‘bought’.  And what does it use for all that buying?  Give yourself an ‘A’ if you said freshly printed fiat money backed by less than a gentle breeze.  There is no capital “thereby”, or any other way, “RETURNED to the private market.”  It’s simply an injection of new cash into the US Treasury’s general fund that the federal government then uses to pay for its spending.

Every one of those ‘monetized’ dollars eventually winds up in the (American and the world) economy diluting the buying power of every other dollar that arrived there first.  The resulting inflation is how it “draws resources (capital) out of the private market.”  That means the dollars that you and I still hold in our wallets, money market funds, CDs, etc will now compete with more dollars out there for the goods and services that we need.  And we wind up paying more of our dollars for them.

Just so we know; the Fed pulls money out of the market when it SELLS its assets for cash money, and then takes those dollars out of circulation (makes them disappear).  That reduces the amount of cash floating out there, and this activity is then deflationary.

Debt monetization – kinda has a nice sanitary ring to it, as if it will somehow help set things right with our ongoing financial crisis.  So let’s all be team players, and not tell Team Obama how we feel about this.

Matters financial and economical - 23may2009 (updated)

George Rebane

The dollar continues its quiet plunge.  Porter Stansberry reports on today’s buzz in world financial circles that the US will soon lose its AAA debt rating, as Great Britain did two days ago.  Bill Gross, world’s largest bond-fund manager, agrees and told Bloomberg that

… the U.S. will eventually lose its triple-A rating. Gross notes that the U.K. was downgraded last night, and the U.K. and U.S. "are similar in debt levels and debt trends." Both countries have prospective deficits of 10% annually, "as far as the eye can see," and those debts may approach 100% of GDP, "a level at which country downgrades tend to occur."

(TLT is the iShares ETF that tracks 20-year treasuries; GLD is the gold bullion ETF)

Meanwhile in Nevada County – at the other end of the world’s financial axis – I attended the annual presentation to the county’s government and business leaders on the ‘state of the county’.  This luncheon – excellent food BTW – is sponsored by the Nevada County Business Association, and today featured representatives from the four major jurisdictions – County, Truckee, Nevada City, and Grass Valley.