Wednesday, February 29, 2012

Unbelievable Stress of Making "Only" $200,000 After Taxes

People who have nothing to eat, no job, and are about to be tossed out of their homes in foreclosure, really do not know what stress is.

To fully appreciate stress, please consider the sorry "plights" of Andrew Schiff, marketing director for Euro Pacific Capital, Daniel Arbeeny, a Wall Street headhunter, and hedge-fund manager Richard Scheiner.

Bloomberg describes the out-and-out horror stories of all three in Wall Street Bonus Withdrawal Means Trading Aspen for Coupons
Andrew Schiff said the $350,000 he earns, enough to put him in the country’s top 1 percent by income, doesn’t cover his family’s private-school tuition, a Kent, Connecticut, summer rental and the upgrade they would like from their 1,200-square- foot Brooklyn duplex.

“People who don’t have money don’t understand the stress,” said Alan Dlugash, a partner at accounting firm Marks Paneth & Shron LLP in New York who specializes in financial planning for the wealthy. “Could you imagine what it’s like to say I got three kids in private school, I have to think about pulling them out? How do you do that?”

Wall Street’s cash bonus pool fell by 14 percent last year to $19.7 billion, the lowest since 2008, according to projections by New York state Comptroller Thomas DiNapoli.

“It’s a disaster,” said Ilana Weinstein, chief executive officer of New York-based search firm IDW Group LLC. “The entire construct of compensation has changed.”

Wall Street headhunter Daniel Arbeeny said his “income has gone down tremendously.” On a recent Sunday, he drove to Fairway Market in the Red Hook section of Brooklyn to buy discounted salmon for $5.99 a pound.

$17,000 on Dogs

Richard Scheiner, 58, a real-estate investor and hedge-fund manager, said most people on Wall Street don’t save.

Scheiner said he spends about $500 a month to park one of his two Audis in a garage and at least $7,500 a year each for memberships at the Trump National Golf Club in Westchester and a gun club in upstate New York. A labradoodle named Zelda and a rescued bichon frise, Duke, cost $17,000 a year, including food, health care, boarding and a daily dog-walker who charges $17 each per outing, he said.

He described a feeling of “malaise” and a “paralysis that does not allow one to believe that generally things are going to get better,” listing geopolitical hot spots such as Iran and low interest rates that have been “artificially manipulated” by the Federal Reserve.

Poly Prep

The malaise is shared by Schiff, the New York-based marketing director for Euro Pacific Capital, where his brother is CEO. His family rents the lower duplex of a brownstone in Cobble Hill, where his two children share a room. His 10-year- old daughter is a student at $32,000-a-year Poly Prep Country Day School in Brooklyn. His son, 7, will apply in a few years.

“I can’t imagine what I’m going to do,” Schiff said. “I’m crammed into 1,200 square feet. I don’t have a dishwasher. We do all our dishes by hand.”

He wants 1,800 square feet -- “a room for each kid, three bedrooms, maybe four,” he said. “Imagine four bedrooms. You have the luxury of a guest room, how crazy is that?”

Summer Rentals

The family rents a three-bedroom summer house in Connecticut and will go there again this year for one month instead of four. Schiff said he brings home less than $200,000 after taxes, health-insurance and 401(k) contributions.

“I wouldn’t want to whine,” Schiff said. “All I want is the stuff that I always thought, growing up, that successful parents had.”
Imagine the Stress

  • Imagine the stress of renting a three-bedroom summer home for only one month instead of four.
  • Imagine the stress of only making $350,000 pre-tax 
  • Imagine the stress of making a mere $200,000 after tax and IRA contributions, and having to wash dishes by hand
  • Imagine the stress of being able to send your kids to the $32,000-a-year for the Poly Prep Country Day School in Brooklyn

Imagine the stress knowing full well that none of the above is enough, yet not being able to whine about it.

“I wouldn’t want to whine,” Schiff said. “All I want is the stuff that I always thought, growing up, that successful parents had.”

This is more than nauseating, so if you need to excuse yourself to take care of matters, please do so now.

Mike "Mish" Shedlock
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Gold Plunges Over $100; Some Blame Bernanke; What Did He Say? Nothing (However, I have 5 Different Interpretations of Nothing)

It was a wild ride in gold today with a top to bottom over $100 as show in the following chart.

Some Blame Bernanke For "Committing to Nothing"

Bloomberg reports Gold Falls in ’Manic’ Plunge as Bernanke Damps Stimulus Bets
Gold futures fell as much as $100 to below $1,700 an ounce on signs that that the Federal Reserve will refrain from offering more monetary stimulus to bolster the U.S. economy.

In testimony before Congress today, Fed Chairman Ben S. Bernanke gave no signal that the central bank will take new steps to boost liquidity.

“People were expecting that the Fed would loosen policies, even if the perception is that the economy is doing well,” James Dailey, who manages $215 million at TEAM Financial Management LLC in Harrisburg, Pennsylvania, said in a telephone interview. “The investor sentiment changed as the Fed committed to nothing. This is the manic nature of the market.”
Bernanke Hints at More QE

In video commentary Fox News says Bernanke Hints at More Quantitative Easing

Hints at More QE? Really? How about this interpretation?

Door is Open, But Not For A While

The Wall Street Journal reports Comex Gold Tumbles On Bernanke Testimony.
"Bernanke's comments to Congress left the door open for more QE," said Steve Scacalossi, a director of precious metals with TD Securities, in a note. "But his statements that employment is recovering at a better than expected rate implies that if QE is coming, it won't be for a while."
QE Increasingly Improbable

The LA Times says Bernanke's testimony in Congress pushes down gold, silver prices
Federal Reserve Chairman Ben S. Bernanke's words carried a great deal of weight in the commodity markets — so much so that they squashed the prices of gold and silver.

Bernanke told Congress that the U.S. economy was probably headed for modest growth this year, adding that the current increase in oil and gas prices probably would reverse before sparking long-term inflation.

The presentation Wednesday signaled to many investors that the Fed's embarking on another round of quantitative easing was an increasingly improbable scenario.

"When Bernanke didn't mention the possibility of another round of monetization, that was enough to take the fizz out of everything," said independent commodities analyst Dennis Gartman. "Before today, gold was looking quite strong, but today it just gave up the ghost."
Overall Dovish Undertones With Markedly Less-Dovish Testimony

Yahoo! Finance reports Euro Tanks, U.S. Dollar Surges on Bernanke Testimony
Federal Reserve Chairman Ben Bernanke was on Capitol Hill today testifying in front of the Committee on Financial Services. Despite overall dovish undertones, the chairman’s testimony was markedly less-dovish than recent Federal Reserve communiqués, boosting the U.S. Dollar across the board.
Bernanke's Actual Testimony

Please consider Semiannual Monetary Policy Report to the Congress, Testimony by Ben Bernanke.

A quick sscan shows Bernanke did not mention the word "quantitative" once. The Only reference to "easing" was in relation to constraints on motor vehicle parts in Japan related to the earthquake.

Bernanke did say growth would be close to or somewhat above second half of last year but "fundamentals that support spending continue to be weak". More specifically the Fed forecasts "2.2 to 2.7 percent, considerably lower than the projections they made last June"

He also said "housing affordability has increased dramatically" but "potential buyers lack the down payment ... others are reluctant to buy a house now because of concerns about their income"

In regards to unemployment, Bernanke said "With output growth in 2012 projected to remain close to its longer-run trend, participants did not anticipate further substantial declines in the unemployment rate over the course of this year. Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate."

That's "markedly less dovish"? Really?

What does that mean for QE?

Nothing. That's what.

People can and did read into Bernanke's testimony what they wanted to hear. Others judged the market reaction, and wrote a corresponding explanation to fit.

One thing's for certain, that was hardly an upbeat assessment of the economy especially in light of the statement that "global financial markets posed significant downside risks".

Here's the deal. If the economy tanks the Fed is likely to do another round of QE. The same holds true for another LTRO by the ECB.

By the way, a couple of the links above came via email from Pater Tenebrarum at the Acting Man Blog, who in turn got them from Lance Lewis. Thanks!

Mike "Mish" Shedlock
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Economy Grew 3.0% Annualized, Faster Than Expected in 4th Quarter; Or Did It?

Reuters reports Economy grew faster than expected in fourth quarter
Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate.

The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised to a 2.1 percent rate of increase from 2 percent. At the same time, growth of real disposable income was revised up to a 1.4 percent rate from 0.8 percent.

"Consumers are spending from rising income rather than digging into their savings to spend," said Shulyatyeva.

Business investment in capital goods was lifted to a 2.8 percent pace from 1.7 percent, but still weak compared to the recent trend. Outlays on home building were firmer than previously estimated, while investment on nonresidential structures was modestly weak.

While a rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion.

"The large boost to GDP growth from stock building in the fourth quarter is unlikely to be repeated in first quarter but the household accounts provide a much more encouraging backdrop for consumer spending," said Peter Newland, a senior economist at Barclays Capital.

Excluding inventories, the economy grew at a 1.1 percent rate, rather than the 0.8 percent initially reported. That was still a sharp step-down from the prior period's 3.2 percent pace.

The report also showed exports were not as strong as previously thought, but imports are also not growing strongly, leaving a smaller trade gap that was less of a drag on growth.

It also showed still moderate inflation pressures, though a

price index for personal spending rose at a 1.2 percent rate instead of 0.7 percent.
GDP Price Indices 

The rise in income is nice but excluding the inventory correction, the rise in GDP was anemic.

Moreover, please note Excel Spreadsheet Table 4.--Price Indexes for Gross Domestic Product and Related Measures: Percent Change From Preceding Period in the BEA's GDP Report.

My friend BC Writes
Does anyone actually believe prices decelerated at a 70% quarterly annualized rate in Q4?

Had the trend rate of the deflator held from Q1-Q3, annualized real GDP for Q4 would be 1.3% instead of 3%, 1.2% yoy, and a slight contraction q-q for real final sales and barely 1% yoy (historically recessionary).

It would not surprise me were the NBER in 3 quarters or more to date a recession as having begun in Q1 '12 after the economy stalled in Q4 '11.

BTW, the Treasury withholding receipts from Jan. to Feb. indicate a contraction in employment, which fits with Gallup's self-reported employment survey.
Mike "Mish" Shedlock
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World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis

A World Bank report to be released next week warns of an economic crisis in China unless state-run firms are scaled back. The Wall Street Journal discusses the report in New Push for Reform in China
An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation's leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.

"China 2030," a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

The report warns that China's growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.
China's Difficult Transition From an Unsustainable Growth Model

Peak oil, a housing bubble, bad debts and over-reliance on investments with no genuine economic feasibility guarantee China's current boom is not sustainable. China bulls are in for a ride awakening when various bubbles pop.

As for recommendations, the report  proposes a sharp increase in the dividends that state companies pay their owner (the government) in order to boost revenue and pay for new social programs.

Does China need to increase competition, break apart, and privatize the state-owned monopolies?
Or should China simply increase the dividends?

I vote for the former as does Michael Pettis at China Financial Markets.

Via email, Pettis says:
The report is good as far as it goes, but it doesn’t go far enough. Of course increasing SOE dividends to the government for use in social programs will transfer wealth from the state sector to the household sector, but if the total profitability of the SOE sector is less than one-fifth to one-eighth of the direct and indirect subsidies transferred from the household sector, as I have argued many times, then even 100% dividends is not enough to slow the transfer significantly, and remember the transfers have to be reversed, not merely slowed. This proposal falls in the better-than-nothing category, but just.

What we really need are much more dramatic transfers, for example wholesale selling of assets, with the money used either to clean up bad loans or delivered directly to households. According to the article, however, “neither the World Bank nor the DRC proposed privatizing the state-owned firms, figuring that was politically unacceptable.”

This is the problem. The best solution for China, economically, seems to be off limits because it will be politically difficult. In that case the second best solution, a gradual build-up of government debt as growth slows for many years, is the most likely outcome.

And how much will growth slow? The World Bank report apparently doesn’t say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years.

That’s better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.

And by the way when it does, metal prices should fall sharply. Copper prices have done reasonably well in the past few months as Chinese buyers have restocked, as we suggested might happen to our clients last fall. With the recent easing we may see more strength in copper over the next month or so, but I have little doubt that within two or three years copper prices are going to be a whole lot lower than they are today. Chinese investment demand simply cannot hold up much longer.
Sad State of Political Acceptability

The report makes feeble recommendations to ensure the proposals are "politically correct". This is a bad practice for three reasons.

  1. You only damage your own credibility
  2. You presume perhaps incorrectly what is politically acceptable
  3. You plant false hope that incorrect solutions will work, when it's clear they will not

It would be far better list the alternatives and the limitations of those alternatives, then provide an honest assessment rather than assume something cannot be done. Unfortunately, telling people what they want and expect to hear is the sad state of political pandering everywhere.

Mike "Mish" Shedlock
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Tuesday, February 28, 2012

Sharpen the Mower: Spain Needs Triple the Budget Cuts and Tax Hikes to Meet EMU Imposed Budget Targets

Conditions in Spain have deteriorated at a rapid pace. As little as a few months ago the Spanish economy was foolishly projected to grow at .7%. Now it expected to contract 1%.

Likewise, Spain's budget deficit was supposed to shrink to 6% in 2011 and 4.4% in 2012. Instead it rose to 8.51 percent in 2011, up from a revised estimate of 8.2% which was up from a revised estimate of 6.5%.

I think you can see a clear pattern here and as a result, the EU Commission Pressures Spain for Explanations.
Spain must explain soon to the European Commission why its 2011 budget deficit was substantially higher than expected and deliver clear future budget plans, the Commission said on Tuesday.

Spain's 2011 budget deficit came to 8.51 percent of GDP, the finance minister said on Monday, up from early estimates of 8.2 percent and far above forecasts from the Commission for something nearer 6.5 percent.

"We need to understand the causes of this significant slippage," Commission spokesman Olivier Bailly told a regular briefing in Brussels.

Spain will have to come up with more than 40 billion euros in savings to meet that target, implying spending cuts that most economists see as impossible given that the economy is already slipping into recession and the jobless rate is the highest in the European Union at 23 percent.

Bailly said Spain also needed to deliver its 2012 budget estimates in the coming weeks, not at the end of March, saying the task in hand was so great it could not be delayed.
Sharpen the Mower

My friend Bran notes that Spain now needs to come up with another 30 billion Euros in budget cuts on top of the 15 billion promised. Moreover, those cuts need to be spread out over 9 months, not 12.

This set of facts prompted the Spanish Gurus Blog to write Sharpen the mower. Spain's deficit exceeds 90 billion euros.
Specifically, Spain's budget deficit is 91.3 billion euros, 8.51% of GDP. So it should not take a wizard to realize the simple mathematical fact that team Rajoy has not yet begun with budget cuts and tax increases, if by 2012 Spain is to meet the 4.4% of GDP deficit target set by creditors.

The measures announced in December were only an appetizer. Instead of sharpening the blades, I think a good lawn mower would be more practical.

The announced cuts and tax increases of last December (income tax, capital gains), are expected to generate about 14,900 million.

To meet the objective of a 4.4% deficit, in 2012 the government deficit should not exceed 46,500 million euros.

To do so requires a nearly 30 billion euros hole to be filled, with the aggravating circumstance that it's now March and those 30 billion euros need to come in the next 9 months.

This figure is double the cuts and tax increases approved last December. So Rajoy has quite imagination if he expects this to happen.
I modified that translation substantially, but I am pretty sure I have it accurate. Spain's unemployment is already 22.9%. What pray tell would another 30 billion in cuts or tax hikes do to that number?

By the way, to go from 15 to 45 is tripling (not doubling) the tax hikes and cuts.

Many structural reforms pertaining to jobs and work rules are quite necessary. The accompanying tax hikes are not and the Spanish economy is poised to implode as a result.

Not to worry, EU commissioner Jean-Claude Juncker promises to "examine the situation with calm and serenity".

Mike "Mish" Shedlock
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Damn the Voters, Full Bailouts (and Existing Policies) Ahead

What's "too complicated" for France is not "too complicated" for Ireland. The Financial Times reports Ireland calls vote on European treaty
Dublin will hold a referendum on the eurozone fiscal treaty, plunging Europe into months of uncertainty and potentially placing a question mark over Ireland’s future membership of the euro.

Enda Kenny, Ireland’s prime minister, said on Tuesday that the government had decided to hold a referendum following advice supplied by the attorney-general that “on balance” the Irish constitution required the treaty to be put to a vote.

He said he would sign the treaty at a European Union summit on Friday and within a matter of weeks the government would organise a referendum commission – an independent body appointed to explain the subject matter of a referendum to the public.

An opinion poll last month found 73 per cent of the public felt a vote should be held on the treaty, which would tighten budget rules for the 17 countries sharing the euro. Some 40 per cent of the 1,000 people questioned in the Sunday Business Post/Red C poll said they would support the treaty, 36 per cent were opposed and 24 per cent were undecided.

The government’s decision to hold a referendum follows a threat by the Sinn Féin party to challenge in the Supreme Court any decision not to give the public a say. Irish officials have privately acknowledged it would be more difficult to win a referendum if the government was seen to have been forced to hold a vote by the Irish courts.

The Irish public have twice rejected EU treaties, only to approve them in second referendums. In 2008 the Lisbon treaty was rejected only to be approved in a second referendum held 18 months later.
Logic of Signing a Treaty then Voting on It

In the real world it makes no sense to sign a treaty then vote on it. In the political world it is a way of telling voters their wishes do not matter, that politicians will hold a referendum as many times as it takes to get a treaty signed.

In a massive landslide, Irish voters swept out Ireland's previous prime minister, only to have Enda Kenny come along and do the exact same things as the politician he replaced.

US Budgets and Bailouts

That is exactly what happened in the US 2008 presidential elections as well. Obama carried out the same bailout policies and the same war mongering policies as Bush.

There is plenty of rhetoric for change, just no real change that anyone can see. Both sides want to do something about the budget, neither side does.

Obama wants to close corporate tax loopholes, then just a few days ago proposed a new set of loopholes for manufacturing, just as Santorum and Romney have proposed. The net result would be an increase in the budget deficit.

There are differences between the parties on social issues, but nothing happens there but hot air.

Romney vs. Obama What's the Difference?

Not your grandfather’s Republican Party; President Obama and Mitt Romney are Nearly One and the Same!

Obama Seeks to Prove He is More Like Romney; Obama vs. Romney - What's the Difference?

Germany Bailouts

Voter sentiment in Germany is overwhelmingly against giving more money to Greece. So why did Chancellor Angela Merkel ram through more aid for Greece?

The answer as explained many times is all Merkel cares about is her legacy, and that legacy says no country can leave the eurozone. Merkel does not give a damn about what is good for Greece, or what her own constituents want either.

French Promises

French President Nicolas Sarkozy will not hold a referendum claiming it's "too complicated". In reality, Sarkozy knows the referendum would be about him (See Referendum on a Person or on a Treaty?).

Everywhere you look, it's a case of "Damn the Voters, Full Bailouts (and Existing Policies) Ahead". Politicians have decided, things are "too complicated to change". Expect a cornucopia of promises from politicians, just don't expect any real change.

Mike "Mish" Shedlock
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Referendum on a Person or on a Treaty?

Reader Andrea from Italy, but who now lives in France adds some insight into Sarkozy's "Treaty Too Complicated For A Vote" excuse.

Andrea writes ...
Hi Mish,

I can add some more info.

Sarkozy started his presidential campaign pledging to be the "president of the people" and saying he wants to give to the people the power to decide about some issues: particularly he said he is going to propose a referendum about a couple of issues, immigration laws and unemployement benefits. As you can easily imagine, these are "minor" subjects for a referendum, normally dealt by executive power.

So, it is very contradictory that he does not want a referendum about the European Treaty, even more in the light of the fact that in recent years France held two referendums about Europe: one about Euro introduction and another about approval of the European treaty signed in 2006 (possibly as complicated as this one). Clearly he knows the topic is a referendum on his own policies and he wants to avoid this.


On second thought, the treaty is too complicated (for his own personal good), not too complicated for the good of France.

President of the people? Is there a president (leader) of the people anywhere? Certainly not Germany, Ireland, Greece, Italy, the United States, Australia, Canada, or anywhere else.

I am tired of the endless brutal lies from politicians everywhere. Unfortunately, such lies on both sides of the Atlantic are going to get much worse.

Mike "Mish" Shedlock
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Monday, February 27, 2012

Sarkozy Breaks Campaign Pledge, Says Treaty Too Complicated For A Vote

French president Nicolas Sarkozy is campaigning on a pledge to consult people directly on "significant issues". However, despite trailing in polls, Sarkozy refuses to agree to referendum on EU fiscal treaty.
Mr Sarkozy, who is trailing the socialist François Hollande in opinion polls seven weeks before the presidential election, came under pressure to promise a referendum on the pact after he pledged to consult the people directly on significant issues if re-elected.

“No,” he replied when asked on French radio yesterday if he would put the treaty to a public ballot. “If you’re dealing with a treaty with 200 articles, 250 articles, I can’t see how you’d formulate a clear question.”

The French electoral calendar means the treaty cannot be passed by parliament until after the election. Mr Hollande has said he will seek to renegotiate parts of the deal if he wins, a move that has been criticised by Mr Sarkozy and German Chancellor Angela Merkel.

Arnaud Montebourg, a prominent party figure who came third in the presidential primary last autumn and has been campaigning for Mr Hollande, went further than the candidate by predicting the treaty “will never be ratified”.

Mr Montebourg said a left-wing majority in France would never vote for the pact, while there was “not a majority” in favour of it in Ireland, the UK or other European countries. “The ‘Merkozy’ treaty would inflict austerity on all of Europe and plunge us dangerously into recession,” he said.
Too Complicated To Form a Clear Question?

Sarkozy says "I can’t see how you’d formulate a clear question.

Mish Attempt to Formulate Clear Question For Voters

  1. Punch Yes to Approve Treaty
  2. Punch No to Disapprove Treaty

Mike "Mish" Shedlock
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Capital Flight From Italy, Greece, Portugal Accelerates; Two Trillion Fantasy; Merkel Weaker Every Week; Crude and Geopolitical Risks

Via Email, here is a nice summary of European events from Steen Jakobsen at Saxo Bank in Denmark. Topics include the G20 Summit, Extend-and-Pretend Dogma, Capital Flight , and Geopolitical Risks.

Steen Writes ...
Two Trillion Fantasy

This week-end's G-20 came and went without any real new information. Yes, the policy makers wants us to believe ultimately IMF will have 2 trillion US dollars at its disposal.

No, the US, UK and rest of non-Europe is not really interested before we all get more clarification on how Europe will ring fence the debt crisis.

This is more and more Wall Street vs. Main Street: Underfunded banks buys underfunded government bonds and underfunded governments guarantees underfunded banks.

The real loser being the unemployed - Edward Heath put it more elegantly: Unemployment is of vital importance, particularly to the unemployed.

Meanwhile the real economy and unemployment is exploding higher adding further burdens to already stretched government deficits.

The new EU forecast for GDP growth in 2012 of minus .3% from this past Friday down from plus .05% is great example of how EU and the debt crisis non-solutions continues to lack behind fundamentals. Soon the rising disconnect will hit the politicians games of buying time.

Capital Flight

Merkel Weaker Every Week

Chancellor Merkel is weaker, week after week. She soon will have to rely on SPD votes if she continues down this path. 62 percent polled over weekend are against giving more money to Greece and 2/3 don't believe Greece can be saved according to German newspaper Bild.

Finland will have an interesting vote this week. Follow it closely.

The G20 did not give more credibility to more funds but they sure talked the talk of extend-and-pretend dogma.

Geopolitical Risks

Crude: We are potentially a few weeks from some sort of confrontation unfortunately. IEA report from Iran is due this week. Israel's time window is closing if you believe the media coming out of Israel. Iran's finances are running out of time as well. Iran failed to pay for Indian rice last week.

High energy prices will soon spill-over into gasoline and survey data and will start to impact data and sentiment negatively.

Greece Controlled Default: Greece will have a controlled default and a vacation from Europe.

Portugal CDS Spreads: Portugal is the real issue and containment is almost impossible. CDS spreads suggest the probability of default within five years is about 65 percent.

Nice money printing week,
Steen Jakobsen
Mike "Mish" Shedlock
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Mathematical Case for Brokered Convention; How Ron Paul Can Throw a Big Wrench Into Romney's Campaign

There are 2,286 republican delegates. It takes 1,144 delegates to win the Republication nomination. With four candidates remaining, many are wondering about the likelihood of a brokered convention where no candidate wins in the first round.

Conventional wisdom suggests there will not be a brokered convention. From where I sit, one is increasingly likely.

Following is a table of delegates won so far (totals from Real Clear Politics Delegate Count), plus my projections of all primaries and caucuses through Super-Tuesday on March 6 (based on recent polls).

Total to Date-24399473220
IowaJan 3286700
New HampshireJan 1012*7003
South CarolinaJan 212520230
FloridaJan 3150*50000
NevadaFeb 42814365
MinnesotaFeb 74021714
ColoradoFeb 73691721
MaineFeb 11249307
MichiganFeb 2830*131124
ArizonaFeb 282929000
WashingtonMar 343131758
GeorgiaMar 6761922278
OhioMar 6661927137
TennesseeMar 6581625710
VirginiaMar 64949000
OklahomaMar 643111895
MassachusettsMar 64128823
IdahoMar 63232000
North DakotaMar 628101233
AlaskaMar 627101133
VermontMar 61711411
Super Tuesday EstMar 678235920210472
If Paul Wins IdahoMar 6782327202104104

* States penalized half of their delegates.

Thru Super-Tuesday Scenarios
Romney 359 Others 423 (Romney wins Idaho)
Romney 327 Others 455 (Romney loses Idaho)


  1. I assigned delegates by expected percentages based on recent polls except in winner-take-all setups. All state delegates were assigned to the above four candidates.
  2. In no instance did I assume Romney would do worse than his most recent polls. In several instances I bumped up Romney's poll percentages substantially.
  3. Points one and two were not done to favor Romney per se, but rather to to give a modest boost to the prevailing idea there would not be a brokered convention.

Michigan Prediction

30 Delegates
Percent: Romney-40% Santorum-35% Gingrich-8% Paul-12%
Delegates: Romney-13 Santorum-11 Gingrich-2 Paul-4
Real Clear Politics Michigan Primary Poll

Arizona Prediction
29 Delegates
Arizona is "Winner Take All"
Romney wins all 29 Delegates
Real Clear Politics Arizona Primary Poll

Washington Prediction
43 Delegates
Percent: Romney-30% Santorum-38% Gingrich-12% Paul-17%
Delegates: Romney-13 Santorum-17 Gingrich-5 Paul-8
Real Clear Politics Washington Caucus Poll

Georgia Prediction
76 Delegates
Percent: Romney-24% Santorum-26% Gingrich-33% Paul-10%
Delegates: Romney-19 Santorum-22 Gingrich-27 Paul-8
Real Clear Politics Super Tuesday Poll (Georgia, Ohio,  Oklahoma, Massachusetts, Vermont)

Ohio Prediction
66 Delegates
Percent: Romney-26% Santorum-38% Gingrich-19% Paul-10%
Delegates: Romney-19 Santorum-27 Gingrich-13 Paul-7

Tennessee Prediction
58 Delegates
Percent: Romney-26% Santorum-40% Gingrich-12% Paul-16%
Delegates: Romney-16 Santorum-25 Gingrich-7 Paul-10
Vanderbilt University Tennessee Primary Survey

Virginia Prediction
49 Delegates
Romney wins all 49 Virginia delegates.
Virginia has a proportional allocation with a twist. Should any candidate take 50% in a district, the candidate will all votes in the district. In a display of complete ineptitude, Santorum and Gingrich failed to collect and turn in enough signatures on time and are not on the ballot. Romney is currently polling about 53% and Paul 23%, but Paul can only win delegates if he outright wins a district.

Oklahoma Prediction
43 Delegates
Percent: Romney-23% Santorum-42% Gingrich-20% Paul-9%
Delegates: Romney-11 Santorum-18 Gingrich-9 Paul-5

Massachusetts Prediction
41 Delegates
Percent: Romney-64% Santorum-16% Gingrich-6% Paul-8%
Delegates: Romney-28 Santorum-8 Gingrich-2 Paul-3

Idaho Prediction
32 Delegates
Romney wins all 32 Idaho delegates
January Straw Poll Results Romney-34% Santorum-10% Gingrich-12% Paul-43%
February Straw Poll Results Romney-45.4% Paul 42.7%

A third straw poll will be held March 1-3 and my answer may change based on the results of that poll.

Ron Paul or Mitt Romney will likely take all of the delegates based on the explanation below. Whether or not Paul or Romney takes all the votes depends entirely on whether or not Gingrich or Santorum can win any counties which at this time looks doubtful.
Idaho Caucus Explanation:
Voters will go to locations for their county and use ballots or tokens to support a candidate on Tuesday, March 6th. There are five candidates for Idaho voters to choose from and they will keep voting until a winner is selected.

In each round the candidate with the fewest votes or anyone with less than 15% is out of the race. The voting ends at the county level when there is a final vote for two candidates or one has more than 50% of the vote for that county.

The delegates assigned for that county will then represent the winning candidate. Counties will report their winner to the state office in Boise. If one candidate has more than 50% of the vote for all of Idaho, they get all 32 delegates. Otherwise, the candidates split delegates they won in each county
I cannot find any recent polls for North Dakota, Alaska, or Vermont. Romney should do extremely well in Vermont and fair at best in North Dakota and Alaska.

North Dakota Prediction
28 Delegates
Percent: Romney-35% Santorum-40% Gingrich-10% Paul-10%
Delegates: Romney-10 Santorum-12 Gingrich-3 Paul-3

Alaska Prediction
27 Delegates
Percent: Romney-35% Santorum-40% Gingrich-10% Paul-10%
Delegates: Romney-10 Santorum-11 Gingrich-3 Paul-3

Vermont Prediction
17 Delegates
Percent: Romney-64% Santorum-16% Gingrich-6% Paul-8%
Delegates: Romney-11 Santorum-4 Gingrich-1 Paul-1

How Ron Paul Can Throw a Big Wrench Into Romney's Campaign

I purposely bumped up Romney's percentages to see if a brokered convention would still be possible. I also awarded Romney all 32 delegates in Idaho even though that race is a statistical dead-heat with Ron Paul.

If Ron Paul wins Idaho, and the rest of my numbers above are close, the odds of a brokered convention are well above 50 percent in my estimation. There may be a brokered convention anyway, provided Santorum, Paul, and Gingrich stay in to the end.

Fuzzy Math

The New York Times discusses The G.O.P.’s Fuzzy Delegate Math.
There are 2,286 delegates to the Republican National Convention, of which 1,144 are required to clinch a majority. The Web site, which has extensive information on delegate-selection procedures in each state, divides them into two broad categories, what it calls “hard” and “soft.” Hard delegates are formally bound to a candidate on at least the first ballot at the convention, while soft delegates are not.

Although this is a useful conceptual framework, it probably simplifies things too much. Instead, Republican delegates exist along something of a spectrum between bound and unbound, pledged and unpledged, hard and soft.

Contributing to the confusion is that there are a series of three interrelated ideas about delegates which are often treated as interchangeable, even though they are not:

  • Bound vs. Unbound Delegates. Is the delegate officially bound to a particular candidate on at least the first ballot at the convention?
  • Pledged vs. Unpledged Delegates. Whether or not she is formally bound to a candidate, will the delegate’s candidate preference be known in advance of the convention and reported upon by the news media?
  •  .
  • Elected vs. Selected Delegates. Was the delegate selected through some relatively direct means, such as based on the popular vote in the state’s primary? Or through some indirect means, like through the series of conventions that often take place in caucus states, and which may not correspond to the popular vote there?

  • Category of Delegates

    Legal Challenges on the Way

    I did not take any of the bound, unbound, super-delegate counts into consideration. However, I was rather generous to Romney in other ways.

    Moreover, there are legal challenges pending in Arizona and Florida. Winner-Take-All primaries are a violation of Republican National  Committee rules if held before April 1. As it stands, Romney 50 Florida delegates and 29 Arizona delegates that could dramatically change the totals.

    Should Romney loses those challenges and also lose Idaho, a brokered convention would be all but certain.

    If Wishes Were Fishes

    If wishes (mine) were fishes, then Ron Paul would win the nomination outright. A more realistic wish is for a brokered convention because Romney, Santorum, and Gingrich are all likely to lose to Obama.

    I believe Paul would defeat Obama although polls don't currently support that idea.

    Republicans Need to Face the Facts

    Of the four candidates, only Ron Paul balances the budget, only Ron Paul wants to stop the war-mongering, only Ron Paul does not alienate the majority of women, only Ron Paul can ignite a fire in independents, and independents (not the radical right), are the key to this election.

    Republicans are not going to vote for Obama so appealing to the far right makes little sense in terms of an overall strategy. Moreover, independents are likely horrified by the war-mongering and misguided statements on religious and social issues of all the candidates but Paul.

    If Republicans lose this election, it will be because they all outdid each other in foolish attempts to appeal to the far right on issues where a huge majority of the population of the US is in the middle.

    Mike "Mish" Shedlock
    Click Here To Scroll Thru My Recent Post List

    Sunday, February 26, 2012

    German Interior Minister Says EU "Should Create Incentives for Exit That Greece Cannot Turn Down"; Greece Delays Swap Until March 8

    It is possible if not likely we have to suffer through at least 11 more Groundhog days as Greece sets March 8 deadline for investors in bond swap.
    Greece has set a March 8 deadline for investors to participate in its unprecedented bond swap aimed at sharply reducing its debt burden, according to a document outlining the offer.

    Greece formally launched the bond swap offer to private holders of its bonds on Friday, setting in motion the largest-ever sovereign debt restructuring in the hope of getting its finances back on track.

    In the document, Greece said the March 8 deadline could be extended if needed. Athens in the past has said it wants to conclude the transaction by March 12.
    Interior Minister Says Greece Should Exit Eurozone

    In yet another break in Merkel's ranks, German interior minister Hans-Peter Friedrich says Greece should exit eurozone.
    With German Chancellor Angela Merkel facing a parliamentary vote Monday on a second Greek bailout, her interior minister, Hans-Peter Friedrich came out over the weekend in favour of Greece leaving the eurozone.

    Friedrich told the news magazine Der Spiegel, “I do not mean that Greece should be kicked out of” the 17-nation eurozone, but he said the bloc should “create incentives for an exit that they cannot turn down.”

    Merkel is opposed to Greece leaving the eurozone, and agreed in January with French President Nicolas Sarkozy that Greece should be kept in the monetary union, as long as its government imposes strict budgetary reforms. She expects the Bundestag to approve the second bailout package in a vote Monday.

    Friedrich, of the CSU, the Bavarian sister party to Merkel’s Christian Democrats, is the first member of the federal government to have spoken out suggesting a radical change of course in euro crisis policy.

    “Outside European monetary union, Greece’s chances of regenerating itself and becoming competitive are definitely better than if it remained inside the eurozone,” Friedrich told Der Spiegel.

    Meanwhile, at a meeting of G20 finance ministers and central bankers in Mexico City, German Finance Minister Wolfgang Schäuble said it made “no economic sense” to be “endlessly” pumping money into eurozone rescue funds.
    It should have been obvious Germany wanted Greece out of the Eurozone no later than January 27 when Merkel demanded Greece to Cede Sovereignty to Eurozone "Budget Commissioner".

    Merkel's Official Denial "I will have no part in forcing Greece out of the euro" Should have made it all the more clear on February 7.

    At the same time Schäuble started "Salami Tactics" on German participation (see above link). On February 23, came the Pact With the Devil Over Gold.

    Then on February 23 Troika Demands 38 New Changes in Greek Tax, Spending and Wage Policies in Next 6 Days.

    Finally, at long last, the German Interior Minister came flat out and stated what previously Finance Minister Wolfgang Schäuble only hinted at, and Merkel herself "officially denied". As I have said many times, Merkel's denial is not plausible. She just not does to be on record as the person causing any country to exit the Eurozone.

    Merkel is to be pitied for one of two reasons.

    1. She is so amazingly dense that she cannot see that Greece needs to leave the Eurozone
    3. She is so concerned about her legacy that she does not have the honesty and decency to say what she knows is true, and she is willing to further destroy Greece in the process.

    I vote for door number 2.

    Mike "Mish" Shedlock
    Click Here To Scroll Thru My Recent Post List

    Saturday, February 25, 2012

    Bill to Destroy California Businesses Introduced in Senate; Bill Mandates Employers with 5 or More Employees to Create "Personal Defined Benefit Plan" Managed by CALPers

    The gall, arrogance, and stupidity of public union pandering has reached new heights. A senate bill sponsored by written by Sen. Kevin de León, D-Los Angeles seeks to force businesses with five or more employees to create personal defined benefit plans, managed by CALPers.

    The Sacramento Bee reports California Democrats push pension plan for nongovernment workers
    Senate Bill 1234, written by Sen. Kevin de León, D-Los Angeles, would require businesses with five or more employees to enroll them in a new "Personal Pension" defined benefit program or to offer an alternative employer-sponsored plan.

    The new system's investments would be professionally managed by CalPERS or another contracted organization. Employees would contribute about 3 percent of their wages through a payroll deduction, although they could opt out of the plan.

    The fund would assume much lower investment returns than the 7.75 percent that the California Public Employees' Retirement System says its investments will generate, de León said.

    Steinberg rejected suggestions that Democrats are pushing de León's bill to fend off pressure to enact substantial public pension changes.

    "Absolutely not. We're not running away from it," Steinberg said, calling de León's bill the private sector "bookend" to public pension reform measures he expects lawmakers will send to Brown before the current session ends.
    Pure Insanity

    There is no polite way to put this so I won't. Sen. Kevin de León is clearly a certifiable nutcase.

    Stoctkon and Vallejo California are both bankrupt over insane promises made to public union employees. So is Detroit Michigan, Central Falls Rhode Island, Providence Rhode Island, and Harrisburg Pennsylvania.

    Numerous other cities will eventually be forced to seek bankruptcy. Los Angeles and Oakland are at the top of the list.

    Numerous airlines and GM went bankrupt over defined benefit pension plans.

    De León's bill would bankrupt countless small businesses trapped in its wake.

    Things That Would Happen If Passed

    1. Immediate large-scale firings by small businesses. No small business owner in his right mind would have over four employees. 
    2. Any business that could, would leave the state. 
    3. Many businesses that do stay would be destined to go bankrupt.
    4. California would end up like Detroit or Greece

    States on the Right Path

    The road to reform is 180 degrees opposite. Governor Scott Walker in Wisconsin, Governor John Kasich in Ohio, and Governor Mitch Daniels are on the right path.

    Five Point Road to Reform

    1. End collective bargaining of public unions
    2. Scrap Davis-Bacon and all prevailing wage laws
    3. Scale back existing pension benefit promises via bankruptcy if necessary
    4. Eliminate defined benefit pension plans
    5. Institute national right-to-work laws

    Corruption of America

    The gall, arrogance, and stupidity of Senate bill 1234 sponsored by Sen. Kevin de León, D-Los Angeles, is absolutely stunning.

    Here are a few particularly relevant paragraphs from my post Fatally Flawed Approaches to the Budget Deficit and Taxes; Debt Will Swell Under 3 of 4 Republican Hopefuls' Tax Plans 
    Porter Stansberry wrote a tremendous article on The Corruption of America and how public unions are at the center of it.

    Golden State on road to Greece, by way of Detroit

    Stansberry touched on Detroit in his article and so did the Orange County Register in an editorial Golden State on road to Greece, by way of Detroit

    The Chicago Tribune reported Chicago teachers asking for 30% raises over next 2 years.

    Is that insane or is that insane? The only way to stop such insanity is by ending collective bargaining of public unions, scrapping Davis Bacon and all prevailing wage laws, and instituting national right to work laws.

    Legal Bribery

    As long as public unions, corporations, and lobbyists can bribe legislators with campaign contributions, then bills are going to be written by public unions, corporations, and lobbyists.
    Tax reform alone cannot and will not work. In addition to a balance budget amendment, something must be done to rein in the power of public unions and corporate lobbyists at the center of this mess.

    Ending collective bargaining rights of public unions and passing right-to-work legislation would be a wonderful first step.


    I missed the words "Employers could make voluntary contributions into the fund." Sorry, but I still don't buy it. This would be the first step towards mandated involuntary contributions. Moreover, maintenance of the plan would cause headaches, and giving money over to CALpers to manage is inane.

    If people want to enter such programs on their own, let them. Mandating businesses offer such plans is another ridiculous burden on all businesses, especially small businesses. Nothing at all stops private companies from offering such plans.

    Who is going to guarantee these benefits anyway, and who will be at risk when the plans fail to meet the goals? The answer today may be one thing, the answer down the road is sure to be taxpayers and businesses.

    Mike "Mish" Shedlock
    Click Here To Scroll Thru My Recent Post List

    160 German Tax Collectors Volunteer to "Help" Greece

    Goodness gracious, how gracious! The German business weekly WirtschaftsWoche reported Saturday that Germany offers to send tax men to Greece
    The German government is prepared to send 160 financial experts to Greece to help the country overhaul its tax collection, the business weekly WirtschaftsWoche reported Saturday.

    Hans Bernhard Beus, deputy finance minister, told the magazine that the tax officials are ready to jump in to help the ailing country. They would need to at least speak English, but about a dozen of the volunteers speak Greek, he said.

    A large number of the volunteers would come from western German state of North Rhine-Westphalia, where state Finance Minister Norbert Walter-Borjans of the centre-left Social Democrats (SPD) told WirtschaftsWoche: “Greece is facing the problems that former East Germany faced in 1990.”

    The central German state of Hesse is also prepared to send in volunteers, the state’s Finance Minister Thomas Schäfer of the conservative Christian Democrats (CDU) said.

    “In helping Greece, we should also entertain the idea of bringing in retired tax collectors, because considerable practical experience could be used here,” he told WirtschaftsWoche.

    In January, the Greek government released a 170-page list of 4,000 tax evaders, who owe the state approximately €15 billion. The Greek government under Prime Minister Lucas Papademos has announced that it will be seriously pursuing tax evaders.
    Is this tax collection help or the beginning of colonization?

    Mike "Mish" Shedlock
    Click Here To Scroll Thru My Recent Post List

    Friday, February 24, 2012

    Stockton California, Population 292,000, Takes Steps Toward Bankruptcy, City Manager Says

    Bondholders of Stockton, California debt are about to be punished as City Manager Takes Steps Toward Bankruptcy.
    Stockton, California, may take the first steps toward becoming the most populous U.S. city to file for bankruptcy next week because of burdensome employee costs, excessive debt and bookkeeping errors that misrepresented accounts, city officials said today.

    The Stockton City Council will meet Feb. 28 to consider a type of mediation that allows creditors to participate, the first move toward a Chapter 9 bankruptcy filing under a new state law. The council will also weigh suspending some payments on long-term debt of about $702 million, according to a 2010 financial statement.

    “Somebody has to suffer and in this case the city manager has decided it should be the bondholders who suffer,” Marc Levinson of the Sacramento-based law firm Orrick, Herrington & Sutcliffe LLP, which represents the city, said at a news briefing at Stockton’s City Hall today.

    Stockton, a farming center about 80 miles (130 kilometers) east of San Francisco, has fought to avert bankruptcy by shrinking its payroll, including a quarter of the roughly 425- member police force. At 292,000, the city has more than twice as many residents as Vallejo, California, which became a national symbol for distressed municipal finance in 2008 when it sought protection from creditors.

    Stockton’s council will be asked to reduce the current budget by $15 million because of newly uncovered accounting errors and fiscal mismanagement that have left the city almost broke, City Manager Bob Deis told reporters. To keep the city solvent through the end of the fiscal year June 30, the City Council will be asked to default on $2 million of debt payments owned to bond holders.

    “Our employees and the citizens of Stockton who receive city services have borne the entire brunt of our restructuring efforts so far and now it’s time for others to do the same,” Deis said in a report to the council. “We can’t ‘grow our way’ out of the problem and no amount of forward looking financial planning will properly fix it.”

    Deis said the city is facing a $20 million deficit in the next fiscal year. Expanded retiree health insurance commitments in the 1990s have left the city with a looming $450 million unfunded liability.

    “Next year, we expect to pay more for retiree health insurance than for our current employees,” Deis said, likening the promises to a “Ponzi scheme.”

    A state law backed by unions and passed last year in response to Vallejo’s bankruptcy requires cities to work with a “neutral evaluator” for at least 60 days before seeking bankruptcy court protection. The process is similar to mediation and gives creditors a right to participate. It can be bypassed if the city declares a fiscal emergency, according to the law.

    Entering the 60-day mediation process could cause a “run on the general fund” by vendors, bankruptcy attorney Lee R. Bogdanoff of Klee, Tuchin, Bogdanoff & Stern LLP, the firm that filed the biggest municipal U.S. bankruptcy on behalf of Jefferson County, Alabama, said today in a telephone interview.
    Once again we see fraud and untenable union benefits at the heart of the problem. The bondholders should suffer, and so should the unions. Those contracts should be wiped out in bankruptcy.

    I commend the actions of the city manager to not tax its citizens to death to meet ridiculous, probably fraudulent, union benefits that should never have been granted.

    Chapter 9 bankruptcy was established to deal with these situations. Unions better get used to it, because more actions like this are coming.

    Mike "Mish" Shedlock
    Click Here To Scroll Thru My Recent Post List

    ECRI Sticks with Recession Call on CNBC; More than a Bit of an Exaggeration by Achuthan to Make His Call?

    ECRI's Lakshman Achuthan sticks with his recession call. This time his call is based on coincident indicators as the following video shows.

    CNBC has an interesting feature where you can click on any snip of generated text and it will take you to that spot in the interview. However, do it a couple times and it hangs.

    Here is the link to a complete transcript if interested: ECRI Sticks With Recession Call

    More than a Bit of an Exaggeration by Achuthan

    At one point Achuthan says "I want to be first on this. On the right-hand side of the chart, that's a 21-month low. It has not -- you haven't had a decline like that in the past 50 years without a recession following in short order, okay?"

    Well - Not OK.

    Annotations in Red by Mish.

    The above chart, clipped straight from the CNBC video, was obviously prepared in advance (I have no problem with that). However,  Achuthan's claim based on that chart is clearly preposterous.

    I count three instances between 1990 and 2000 where ECRI coincident indicators flagged a recession by the methodology Achuthan cited.

    I have numerous other problems historically with ECRI claims, including their alleged "perfect" track record. Please see A Look at ECRI's Recession Predicting Track Record for details.

    This time, I happen to think Achuthan has very valid points. However, once again, Achuthan has a hard time articulating them in a purely factual manner in spite of the fact he is clearly bright and articulate.

    Mike "Mish" Shedlock
    Click Here To Scroll Thru My Recent Post List

    Fatally Flawed Approaches to the Budget Deficit and Taxes; Debt Will Swell Under 3 of 4 Republican Hopefuls' Tax Plans

    A number of proposals on taxes and the budget have come out recently, one by President Obama, one by Mitt Romney, and one by a friend, John Mauldin.

    Every one of the proposals are fatally flawed, most of them for multiple reasons. Before one can fix a problem one must understand it.

    In general, Democrats want to raise taxes and spend money.

    Republicans on the other hand generally want to cut taxes and spend money. Military spending and Medicare spending both soared under Republican. Bush signed a disastrous Medicare bill.

    Both parties claim to be against deficit spending. However, if neither party wants deficit spending then why are their deficits?

    Before we get to what's wrong let's take a short look at some recent proposals.

    Tax Cuts to Prosperity

    Mitt Romney proposes A Tax Reform to Restore America's Prosperity
    First, I will make an across-the-board, 20% reduction in marginal individual income tax rates.

    Second, I will reduce the corporate tax rate to 25% from 35%, transition from a world-wide taxation system to a territorial one, and make the R&D tax credit permanent.

    Third, I will promote savings and investment by maintaining the low 15% rate on capital gains, interest and qualified dividends, and eliminate the tax entirely for those with annual income below $200,000.

    Fourth, I will take long overdue steps to correct failures in the tax code. I will abolish the death tax, whose primary effect today is to foster elaborate schemes for transferring wealth. I will also repeal the Alternative Minimum Tax, which was intended to make the code simpler and fairer but has accomplished precisely the opposite.

    Fifth, I will bring stability to the tax code by making these changes permanent.
    A Simple Question

    Excuse me for asking a simple question: How the hell are you going to pay for this?

    What spending cuts would Romney make? He did not have the decency to say.

    Take another look at point number 5. It's a blatant lie. There is no way to make changes permanent. Any Congress at any time can make tax changes undoing prior Congressional actions.

    Obama's Plan to Close Tax Loopholes

    President Obama has a plan to lower the corporate tax  rate. However, on close inspection, To close tax loopholes, Obama would open new ones
    President Barack Obama wants to close dozens of loopholes that let some companies pay little or nothing in taxes. But he also wants to open new ones for manufacturers and companies that invest in clean energy.

    To some analysts, the new loopholes risk upending the level playing field Obama says he wants to create.
    Is Obama attempting to level the playing field on taxes or level the playing field with a potential presidential debate with Rick Santorum and Mitt Romney on manufacturing?

    Who knows? What I do know is this will do nothing to cut the deficit.

    Obama, Romney Tax Plans Propose Unfunded Corporate Rate Cuts

    The Huffington Post reports Obama, Romney Tax Plans Propose Unfunded Corporate Rate Cuts
    President Barack Obama and Mitt Romney have begun a new form of competition: proposing corporate tax cut plans that they claim, wrongly, won't cost the Treasury a dime. Almost immediately after Obama unveiled his plan on Wednesday, one of the nation's leading tax policy experts threw cold water on the administration's claim that its tax overhaul could be implemented "without adding a dime to the deficit." A separate plan released Wednesday by Republican presidential contender Romney, the expert said, would almost certainly expand the deficit.
    Debt Will Swell Under 3 of 4 Republican Hopefuls' Tax Plans

    Given the pathetic lack of details in most tax plans one should not be surprised to learn Debt Will Swell Under 3 of 4 Republican Hopefuls' Tax Plans
    The national debt would balloon under tax policies championed by three of the four major Republican candidates for president, according to an independent analysis of tax and spending proposals so far offered by the campaigns.

    The lone exception is Texas Rep. Ron Paul, who would pair a big reduction in tax rates with even bigger cuts in government services, slicing about $2 trillion from future borrowing.

    According to the report released Thursday by U.S. Budget Watch, a project of the bipartisan Committee for a Responsible Federal Budget, former Pennsylvania senator Rick Santorum and former House speaker Newt Gingrich would do the most damage to the nation’s finances, offering tax and spending policies likely to require trillions of dollars in fresh borrowing.

    Both men have proposed to sharply cut taxes but have not identified spending cuts sufficient to make up for the lost cash, the report said. By 2021, the debt would rise by about $4.5 trillion under Santorum’s policies and by about $7 trillion under Gingrich’s plan, pushing the portion of the debt held by outside investors to well over 100 percent of the overall economy, the study said.

    The red ink would gush a little more slowly under former Massachusetts governor Mitt Romney, the report said. Until this week, Romney had paired $1.35 trillion in tax cuts with $1.2 trillion in spending reductions, leaving the debt rising on a trajectory that closely tracks current policies.

    But that changed Wednesday, when Romney proposed to cut federal income tax rates by 20 percent more for all earners, which would slash U.S. revenue by more than $2 trillion over 10 years.

    Romney economic adviser Glenn Hubbard said the lost cash would be recovered by closing tax loopholes and boosting economic activity. But until the campaign offers a more specific plan, Budget Watch analysts said Romney’s entire framework would add about $2.6 trillion to the debt by 2021.

    Only Paul emerged as a fiscal conservative in the report. His policies would cut tax revenue by more than $5 trillion over the next decade, the report said, but the loss would be offset by more than $7 trillion in spending cuts, including deep reductions in defense and federal health programs.
    The True Conservative

    Romney, Santorum, and Gingrich are collective hypocrites and fake conservatives. Ron Paul stands alone as a true fiscal conservative and a true conservative on military policy as well.

    John Mauldin VAT Proposal

    Rather than cut taxes, Mauldin primarily seeks to fix the deficit by hiking taxes. Let me say up front that Mauldin is a friend, he is a Republican, and on this issue I politely suggest he is also off his rocker.

    Please consider snips from The Cancer of Debt and Deficits by John Mauldin.
    The growing debt and the deficit is a deadly cancer on the economy. It will deliver a mortal blow to the economy if not dealt with.

    The problem is solvable. It is not that there are not a lot of solutions. It is that we have not yet found the political will to decide what course of treatment is needed. Let’s start with a few basic presuppositions that I think must be addressed in order to marshal an effective set of choices.

    1. It has to be politically feasible. The Right would like to address the problem with spending cuts and reforms. Reforms and spending cuts are necessary but not sufficient to deal with the problems. For instance, disability payments are now running $200 billion a year and growing rapidly. Some 25% of those unemployed since the beginning of this crisis have somehow qualified for disability payments. We can cut the time allowed for unemployment benefits, but that does not offer large numbers. Government transfers now account for 22% of household income. Cutting that will be politically difficult.

    The real problem is health care. How much do we want and how do we want to pay for it? Health care must be thoroughly reformed, but the will (the votes) to go back to the 1990s is just not there. Rising costs can be controlled but not eliminated. The same goes for Social Security. We can raise the retirement age, do means testing, and make other changes; but the fact is that there are more Baby Boomers retiring each year. There is no Social Security Trust Fund. The money was spent on other projects, and now Social Security runs in the red each year. What Republican is running on a platform of taking away Social Security from those who are presently receiving it or will be eligible for Social Security within 10 years? Want to cut defense? Military pensions? Government pensions.


    The hard reality is that the rich just don’t make enough to cover our current deficit. If we raised taxes to something like 60% on the top 10% of income earners, not just the 1%, we might get enough tax revenue, if the “rich” cooperated by making the same income they do now. That type of tax rate is just not politically feasible under any conceivable elected Congress.

    It will require both spending cuts AND different and higher forms of revenue to get a deficit reduction plan through Congress, even a majority Right or Left Congress. If Obama could not get higher taxes (except for health care in the future) in his first two years, with a decidedly Democratic Congress, it is very unlikely to happen in time to deal with the deficit crisis. Something must be done SOON. We don’t have another five election cycles to debate this.


    [Citing Marc Sumerlin and Larry Lindsey, economic advisors in the White House, and co-authors of a book What a President Should Know … but most learn too late Mauldin adopts their suggestions]

    Marc outlined to me their thoughts on reforming the tax code. I read the chapter in the book on reforms, and like it better than anything else I have seen.

    What they suggest is to tax consumption with a 20% Value Added Tax (VAT). There would be no taxes for incomes under $100,000. None. No Social Security. No Medicare. If you make less than $100,000 you pay nothing.

    All income over $100,000 is taxed at 20%, no matter what the source. No capital gains rate or dividend break. I assume that also means no municipal bond exemptions. No exemptions for anything. Every last tax expenditure goes away. Corporate tax rates would be 20%, and again I assume no exemptions. If you make a profit, you pay taxes.

    They also note that their proposal was revenue-neutral in 2007, and included a $2,000 per child tax credit. Every worker would get an approximate 7.5% pay raise from the removing of Social Security and Medicare taxes. While businesses would also get that same tax break, they would have to pay a VAT on salaries, which would be an increase in cost. Welfare, the social safety net, and health care would all be funded.

    One can adjust the levels of both the VAT and income taxes to match the desired level of government spending. I might prefer less, but that is not the point here. Match these taxes (along with the normal excise taxes) with entitlement reform, a properly structured health-care system, and some cuts in other areas, and you are close to a balanced budget.
    Politically Feasible - Not

    For starters, Mauldin's proposal immediately violates requirement number one.

    The proposal is not close to being politically feasible.  Even it it was politically feasible, it would be a horrendous idea. To see why let's start with a look at spending.

    Military Spending

    Military spending
    may not be the biggest problem, but it certainly is a very big problem.

    Indeed the US spends as much as the next 14 nations combined.

    Defense Outlays

    The above chart is from Decline and Fall of the Roman Empire by Jeffrey Gundlach

    Warmongers (basically Republicans, Democrats, and President Obama with a few exceptions like Ron Paul) like to point out that defense spending is shrinking as percentage of the budget.

    However, anyone with any common sense will point out a needless rise from $300 billion to close to $800 billion, now projected to be around $700 billion. This happened because of inane wars in both Iraq and Afghanistan.

    Now the warmongers are hell bent on starting a war with Iran even though the price of oil is soaring and Israeli Intelligence Concludes "No Iranian Nuclear Weapons Program"

    What If?

    What if we could roll back the hands of time to when Bush was trumping up complete nonsense about weapons of mass destruction in Iraq and make a change. The change I want to make is to have in place a balanced budget amendment that allows no exceptions.

    You want more spending, then you either cut spending elsewhere or raise taxes.

    Would Republicans have been so gung-ho about starting that war? If they did start it, would the public have stood for all the tax increases to pay for it?

    What if we could roll back military spending to 2003 levels? Why is that impossible?

    Note that the US has troops in 140 countries. Does the UDS need troops in ANY country but the US? I suggest, as does Ron Paul, as would any true constitutionalist conservative, the answer is no.

    Defense vs. Healthcare

    Defense is a problem, but Healthcare is an even bigger problem.

    Mauldin pointed out "disability payments are now running $200 billion a year and growing rapidly". I pointed out the same thing in Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January.

    Before we start raising taxes, don't you think we ought to cut out the fraud?

    And what about Medicare fraud? What about Medicaid fraud? What about Food Stamps?

    Economic Insanity from Gingrich

    Please consider Economic Insanity from Gingrich on Marijuana Use: Life imprisonment With No Parole; Who Benefits from War on Drugs? Big-Brother Expansionist Ideas: Gingrich Proposes "Free Radios" for Everyone in Cuba!

    Yes, Gingrich actually proposed "Free Radios" for Everyone in Cuba. He also proposed drug testing for food stamp recipients. I had three questions for Gingrich.

    Three Questions for Gingrich

    1. How much will it cost to administer drug tests to everyone getting a government subsidy?
    2. How much more chipping away at states' rights does Gingrich want?
    3. How can this proponent of big government even call himself a Republican?

    See how easy it is for even Republicans to propose complete nonsense? Both parties will keep doing the same thing if we blindly follow Mauldin's guide of raising the VAT to meet expenditures.

    Mish Food Stamp Proposal

    When it comes to food stamps I have a far better set of ideas than Gingrich's drug testing proposal.

    • Do not let those on food stamps buy frozen pizza, potato chips, snacks of any kind, soft drinks, etc.
    • Explicitly limit food stamp users to generic (store brand vs. name brand) dried beans, rice, peanut butter, pasta, canned vegetables, canned soup, soda crackers, fresh vegetables, fresh fruit, frozen (not bottled) juice, poultry, ground beef, chuck steak, bread, cheese, powdered milk, eggs, margarine, and general baking goods (flour, sugar, spices).
    • Calculate a healthy diet based on current prices, number in the family, ages of recipients, and base food stamps allotments on that diet.

    My proposal will not only lower the cost of the food stamp program, healthy diets would lower Medicaid and Medicare costs as well. Moreover my proposal would give people a strong incentive to get off the food stamp program without intrusive, costly big-brother ideas like drug testing which cannot possibly work for the simple reason that anyone who fails will steal to get food rather than starve. Also note that Gingrich's proposal would harm innocent kids on the program. My idea would help them nutritionally.

    Corruption of America

    Porter Stansberry wrote a tremendous article on The Corruption of America and how public unions are at the center of it.
    It has now been almost 50 years since the start of the War on Poverty, President Lyndon Johnson's program to radically increase domestic welfare spending. These programs and their various spinoffs have been at the center of Democratic politics ever since. In fact, if you compare speeches about these programs from the mid-1960s until today, you will find the verbiage never changes. Obama is merely echoing the same calls for "social justice" that Robert Kennedy used in his ill-fated 1968 campaign for president.

    But besides the soaring rhetoric, besides the promise of a "chicken in every pot," what have these programs actually achieved? The wholesale destruction of urban communities across America, communities that are overwhelmingly African American. If the intention of these programs had been to destroy black communities, you could have hardly done more damage than the last 50 years of Democratic policy.

    I don't think most Americans realize how dangerous these communities have become or the toll they take on our country as a whole. That's primarily because talking about this problem is seen as racist. That's complete nonsense. The victims of these policies are primarily black people. Trying to help them restore dignity and independence to their communities isn't a racist goal. It's humanitarian.

    In Detroit, only 27% of the black male students in the school system graduate from high school. This is not a racial problem: Only 19% of the white male students graduate from those same schools. What's causing this problem? A complete breakdown of society. When communities can no longer teach their children the most basic academic skills, such as reading, math, history, literature, and economics... what future can we expect? And what kind of society do you expect after several generations of total ignorance?

    How did this all happen? How did we end up with expensive schools that can't teach? How did we end up with young mothers who aren't married? How did we end up with entire generations of people who won't – and probably can't – work in the labor force? How did we end up with a skyrocketing prison population? The prison population in America has soared from less than half a million people in 1980 to more than 2.5 million people today. More than 7 million adults are in prison or on parole in the United States. We have an incarceration rate that's seven times higher than any other industrialized nation.

    Let's ask the most basic question: What has the gigantic increase in welfare spending and education spending done for the underclass of America?
    The article is lengthy and it starts out slowly but quickly picks up. At times Stansberry uses some politically incorrect language that may appear racial. It's not. He attacks Republicans and Democrats alike, whites and blacks alike. He talks about the corruption of unions and the corruption of corporations. Everyone would be well served to read the entire article.

    Golden State on road to Greece, by way of Detroit

    Stansberry touched on Detroit in his article and so did the Orange County Register in an editorial Golden State on road to Greece, by way of Detroit
    California's tax burden, according to the Tax Foundation, is heavy. The Register reported that per-person state and local taxes, fees, licenses and "intergovernmental revenue" amount to $8,634, ranking California 13th-highest among the states. California businesses fare worse, the Tax Foundation said, ranking 48th in tax climate, based on corporate, income, sales, property and unemployment insurance taxes.

    What's unsaid is the effect on individuals of extremely high corporate taxes. Companies not driven out of state or out of business are less likely to hire or expand, more likely to contract and struggle to provide for current employees.

    But high taxes are needed to pay for leftist policies that interject government into private life, while heaping generous benefits on government workers who do the interjecting. Progressives, as they like to call themselves, seem oblivious to Big Government's damage.

    We have a glimpse of where this leads. It's called Detroit.

    Detroit is where "all the major economic planks of the statist or 'progressive' platform have been enacted," writes Jarrett Skorup of the Mackinac Center. "A 'living wage' ordinance, far above the federal minimum wage, for all public employees and private contractors. A school system that spends significantly more per pupil than the national average. A powerful school employee union that militantly defends the exceptional pay, benefits and job security it has won for its members. Other government employee unions that do the same for their members. A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies."

    Sound like California? What has all this done for Detroit, "dubbed the most liberal city in America"? Detroit in 1950 was America's wealthiest city on a per capita income basis. Today it's the second-poorest major city.

    "[I]t is striking that the decline in per capita income is exactly what classical economists predict would occur when wage controls are imposed and taxes are increased," Skorup writes.

    Despite progressivism's poisoned fruits on display, what does California do? Recent headlines trumpeted proposed tax increases of billions, additional "rights" for state government workers and clamoring for more tax subsidies for education and health care and, let us not forget, Gov. Jerry Brown's desire to squander billions on a high-speed train no serious analyst says can operate profitably, if it can even be built for its estimated $98.5 billion.
    Still Like That VAT Idea?

    Anyone still like that VAT idea? If so expects states like California and Illinois to embrace it. Expect every public union in the country to be clamoring for more tax hikes to support more wage hikes.

    Heck, they already are, even before a VAT. On February 17, the Chicago Tribune reported Chicago teachers asking for 30% raises over next 2 years.

    Is that insane or is that insane? The only way to stop such insanity is by ending collective bargaining of public unions, scrapping Davis Bacon and all prevailing wage laws, and instituting national right to work laws.

    Desired Level of Government Spending

    Instead of blindly raising taxes, I propose we take a serious look at every government program and decide what is really needed. Student aid is another program of negative benefit. Such aid drives up the cost of school and makes debt slaves out of some kids for life. The program needs to be scrapped entirely.

    Returning to Mauldin's thesis that any proposal must be politically feasible, spending cuts alone will not fly.

    However, Republicans need to demand a lot in return for any necessary tax hikes. As a compromise, I would accept Some amount of tax hikes in return for scrapping Davis Bacon, ending all prevailing wage laws, and instituting national right to work laws.

    Those actions will help cities and states get back on their feet. But we also need pension reform, welfare reform, drug imports from Canada,  and a host of other items including tax reform.

    I am against a VAT completely. And I certainly do not like exempting the first $100,000 because the tax burden would then fall only on the middle class.

    Instead of a VAT, and in order to be fair to everyone, a sales tax that excludes food, shelter, medicine, and perhaps clothing is the way to go. Everyone gets the same break so the proposal is fair. However, the poor spend nearly all their money on food, shelter, medicine, and clothing, so they benefit proportionally speaking.

    A national sales tax is easy to collect, hard to avoid, and promotes saving over consumption, all of which are very good things. Perhaps some combination of income tax and national sales tax is the way to go, but only after eliminating fraud and unnecessary spending.

    In this regard, a very good place to start would be with Ron Paul's proposed cuts.

    The cardinal rule of taxes is legislators will spend every dime collected and then some so a definite control is needed. I propose a balanced budget amendment to stop both parties from doing just that.

    Legal Bribery

    The above actions are a good start but corporations and unions like to buy votes. Lobbyists write our legislation and they are often the only ones who really know what is in the bills and why. Nancy Pelosi famously remarked "we have to pass the health care bill to see what's in it". Indeed. But the lobbyists knew. They read every line of it.

    As long as public unions, corporations, and lobbyists can bribe legislators with campaign contributions, then bills are going to be written by public unions, corporations, and lobbyists.

    The result is the worst legislation (from a taxpayer perspective) that money can buy. Proof is easy to find. There are 72,536 Pages of Tax Code.

    Nearly all those pages of code exist because some corporate or union sponsor made campaign contributions to some member of Congress who piled on page after page of tax code.

    My proposal to end collective bargaining of public unions and institute right to work laws will fix one of the problems, but something still needs to be done about corporate campaign bribery. I am open to ideas.

    Correct Approach

    The correct approach is not Obama's, not Romney's, and not Mauldin's.

    Three Step Approach

    • First, there are numerous structural problems and fraud items as noted above that should be fixed as part of a compromise package.
    • Then before deciding on the amount of tax, we need to take a serious look at Ron Paul's proposals to see what we can get rid of. 
    •  Then tax code needs to be simplified in a fair way, as would my national sales tax idea exempting food, medicine,  and clothes (Perhaps a combination sales tax and income tax).

    Unfortunately that still is not enough. Congress is highly unlikely to do this on its own. We need a presidential leader willing to make tough choices, not just say he is willing to make tough choices.

    Obama has clearly failed. By their pathetic proposals to date, so will Mitt Romney, Newt Gingrich, and Rick Santorum.

    And so here we are, careening towards the 2012 elections with a guaranteed loser as a sitting president, and unless Ron Paul pulls off a miracle, a set of fatally flawed candidates with fatally flawed proposals on what to do about the deficit on the Republican side as well.

    Mike "Mish" Shedlock
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