America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we’re broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year’s retirees from the IRS, the SEC and the Department of Energy.
Why Isn’t Wall Street in Jail?
Most Americans know about that budget. What they don’t know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.
Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the “other” budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. “Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. “Every one of these transactions is outrageous.”
Monthly Archives: April 2011
On The US Budget Deficit & Debt
Obama adds fuel to confusion but no resolution, Mohamed El-Erian:
A friend and former colleague of mine, Paul McCulley, once made the distinction between those who were “responsibly irresponsible” and those who were “irresponsibly irresponsible”. The two notions explain why more unsatisfactory last-minute policy compromises are now likely, despite President Barack Obama’s impressive speech on how America must move forward to tackle its debt ceiling, and its wider problem of budgetary reform.
Mr Obama proposed cutting $4,000bn from deficits over the next 12 years, reducing government outlays to Medicare and Medicaid healthcare programmes, and even considered tax increases. His speech therefore provides an important opportunity to advance this debate, but a much broader context is still needed if it is to succeed in overcoming both domestic political stalemates and growing concerns abroad.
Back in the final quarter of 2008 and the beginning of 2009, it was right for the US to behave responsibly irresponsible. At that moment every available part of the public sector balance sheet, from the Federal Reserve’s to the Federal budget, had to be used to avoid an economic depression. And it worked.
The radical right and the US state by Martin Wolf:
What does the rise of libertarianism portend for the future of the US? This is not a question of interest to Americans alone. It matters almost as much to the rest of the world. A part of the answer came with the publication of a fiscal plan, entitled “Path to Prosperity”, by Paul Ryan, Republican chairman of the house budget committee. The conclusion I draw is the opposite of its author’s: a higher tax burden is coming. But that leads to another conclusion: much conflict lies ahead, with huge implications for politics, federal finance and the US ability to play its historic role.
An analysis of the Ryan plan by the Congressional Budget Office makes the point. Its “extended-baseline scenario” assumes that current law remains unchanged. Under that assumption, revenue would rise from 15 per cent of gross domestic product to 21 per cent in 2022 and on to 26 per cent in 2050. Spending would rise substantially, too, from 23¾ per cent of GDP in 2010 to 30¼ per cent in 2050. As a result, the deficit would fall from today’s levels while debt held by the public would rise to 90 per cent of GDP in 2050.
As the CBO makes plain, this is an optimistic scenario. Current law includes, most notably, the assumption that the 2001 and 2003 tax cuts will expire, as legislated. Together with the impact of fiscal drag from economic growth and inflation, this generates the rising share of revenue in GDP. On the side of spending, the share of social security in GDP rises modestly, from 4¾ per cent of GDP in 2010 to 6 per cent in 2050. The share of all other spending (including defence), apart from that on health, is assumed to fall to close to its long-run average of 8 per cent of GDP. But health spending explodes, from 5½ per cent of GDP in 2010 to 12¼ in 2050.
White House visitor logs leave out many
A foot of snow couldn’t keep Bob Dylan, Joan Baez, Jennifer Hudson and other celebrities away from a star-studded celebration of civil-rights-era music, hosted by President Barack Obama and first lady Michelle Obama at the White House in February 2010.
Dylan’s haunting rendition of “The Times They Are a-Changin'” was a highlight of the dazzling evening. The digitally friendly White House even posted the video of his performance on its website.
But you won’t find Dylan (or Robert Zimmerman, his birth name) listed in the White House visitor logs — the official record of who comes to call at 1600 Pennsylvania Ave., which is maintained by the Secret Service.
Ditto Joan Baez.
What I Learned About Natural Gas from Boone Pickens
Here is what Pickens said:
– Global demand for oil is 86-88 million barrels per day. It will be 90 million by the end of the year, due to global growth.
– Global production is 84 million barrels per day. Since production falls short of demand, prices have risen.
– America consumes 20 million barrels of oil per day. We produce 7 million barrels domestically and import the other 13 million barrels. Of the 13 million barrels of imported oil, 5 million come from OPEC – “nations that hate us,” says Pickens.
– The true cost of Middle Eastern oil is over $300 a barrel if you account for U.S. military presence in the Middle East, according to Pickens.
– “Drill baby, drill” – the conservative mantra to drill more oil from the Gulf of Mexico, off the East and West Coast shelves, and the Alaska Natural Wildlife Refuge (ANWR) would produce an extra 2 million barrels a day at best, says Pickens. The would raise America’s domestic production from 7 million to 9 million barrels but still leave America 11 million barrels short each day.
– In ANWR, the bottleneck is the pipeline from Alaska’s north shore. “It would take 30 years to build another pipeline,” says Pickens.
Well worth reading.
Enterprise remains rooted in the land
Farmers were the first entrepreneurs. About 10,000 years ago, in Phoenicia and Mesopotamia, humankind started to cultivate crops and converted from hunter-gatherers to settlers. This initiative enabled cities and, indeed, civilisation to flourish.
Since then, agriculture has developed into a modern industry. But it remains dominated by family concerns, headed by rural entrepreneurs focused on the same core issues as their ancient predecessors: land, water, weather, disease, soil and yields.
Traditionally, farms were passed down the generations, offering modest but volatile cash returns and the possibility of long-term capital appreciation – at least, for those who were not tenant farmers. But while more than 90 per cent of farms in countries such as Britain and the US remain privately held, big business has become seriously interested in the sector.
The soft commodities boom of recent years means that many institutions now see farmland as an attractive asset class and an offset against inflation. Hedge funds, private equity, pension and insurance groups are all investing in land in places such as Brazil, Ukraine and Africa. This weight of capital, as well as better farm incomes, has helped drive farmland prices up. Meanwhile, demand among these investors for agricultural opportunities in mature economies such as the US, Australia and Canada has also increased.
Facing Default, Publisher Lee Enterprises Sells ‘Junk’ to Foil Distressed Investors
Newspaper chain Lee Enterprises Inc. is on the verge of saving itself from bankruptcy–and many of its debt holders are livid.
Lee, weighed down by about $1 billion of debt, has long been high on the list of potential bankruptcies. But thanks to the roaring market for debt of risky companies, Lee is preparing to sell junk bonds that would enable it to pay off its obligations and give it a new shot at survival.
But what is good news for the company has thwarted the plans of a flock of “vulture” investors–Monarch Alternative Capital, Alden Global Capital, Marblegate Asset Management and a unit of Goldman Sachs Group Inc.–which have been buying Lee’s loans. The group had been betting the company would default, and that they could turn their holdings into an ownership stake, giving them access to the company’s assets, which include St. Louis Post Dispatch and the Arizona Daily Star newspapers.
…..
Lee incurred much of its debt in 2005 when it paid top-dollar to buy Pulitzer Inc., a chain of 14 newspapers including the St. Louis Post-Dispatch. The combined company would have been a particularly valued prize because, unlike many of the other publishers that went bankrupt in recent years, the company generates over $100 million of free cash flow despite its debt load. The publisher’s focus–running small and midsize papers and keeping a rein on costs–has insulated it from the worst of the decline in subscriptions and advertising affecting newspapers in metropolitan markets.
Lee owns half of Capital Newspapers, publisher of the Wisconsin State Journal.
Weekend Shopping Notes
Strawberries: 32oz @ Sam’s Club $3.76, @ Metcalfe’s 16oz for $3.00.
McCann’s Steel Cut Irish Oats @ Trader Joe’s $4.99.
Sabra Hummus 25oz @ Sam’s Club: $5.96, 25oz.
Kangaroo Whole Wheat Pita Pocket @ Woodmans: $0.99.
Red Romaine Lettuce: $1.98/lb @ Metcalfe’s.
Stonyfield Raspberry Yogurt $0.79 @ Woodmans
Chobani Greek Yogurt @ Sam’s Club: $10.95 for 12.
God’s Glory: Spring Flowers begin to Appear on a Gorgeous Sunday
You Call This Global Leadership?
The US government is about to be shut down in the next 24 hours over the federal budget impasse. Here are the only numbers you need:
Federal spending is approx. $3.7 trillion, the deficit this year alone is projected at $1.4 trillion – and the politicians are squabbling over spending cuts amounting to $33-40 billion; that’s 1% of spending and 2.9% of the deficit. You gotta be joking, right?
Related:
Reforming the Banks
just got back from a very interesting but hectic week in New York and Washington, followed by two days at a conference in Hangzhou. During my meetings I noticed that much of the discussion, and many of the questions I was asked by both government officials and investors, focused on debt levels and reforms in the Chinese financial system. I have written a lot about rising debt in China and am glad that analysts and policymakers seem to be spending a lot more time thinking about balance sheet issues. Every case of rapid, investment-driven growth in the past century, as far as I can make out, has at some point reached a stage in which debt levels rose to unsustainable levels and precipitated either a debt crisis or a long grinding adjustment period.
The reason debt levels always seem to grow unsustainably, I suspect, is that in the initial stages of the growth model much if not all of the investment is economically viable as it pours into building necessary infrastructure whose profits and externalities exceed the cost of the investment. The result is real growth. At some point, however, the combination of subsidies, distorted incentives (in which investment benefits accrue to those making the investment while costs are shared broadly through the banking system), and very cheap financing costs leads inexorably to wasted investment and debt rising faster than asset values. This is when the debt burden begins to rise in an unsustainable way.