Private pay shrinks to historic lows as gov’t payouts rise

By Dennis Cauchon, USA TODAY

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program

to counteract the downturn. The result is a major shift in the source of personal income from private

wages to government programs.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The

federal government depends on private wages to generate income taxes to pay for its ever-more-e

expensive programs. Government-generated income is taxed at lower rates or not at all, he says. “This is

really important,” Grimes says.

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Three Will Get You Two (or) Two Will Get You Three

Bill Gross, June 2010 Investment Outlook, www.pimco.com

You load sixteen tons, what do you get?
Another day older and deeper in debt.
Saint Peter, don’t you call me ‘cause I can’t go;
I owe my soul to the company store.
– Tennessee Ernie Ford

Debt will get you in trouble – on both sides of the dollar bill as Shakespeare wisely counseled long ago: Neither a lender nor a borrower be. That probably seems like a strange admonition coming from a guy who helps to lend $1 trillion of it – and I suppose it is. But there was a time back in 1968 when lending got me in lots of trouble – deep doo-doo, to tell you the truth – and I’ve regretted it ever since. I was a Naval officer back then, sailing between the Mekong Delta and Manila Bay. Strangely enough, it was in the Philippines, not Vietnam, where I lost my moral compass and ran aground. I started a shipboard replica of a “payday” lending company operating under the principle of “two will get you three.” Sailors in port were always short of cash and yours truly – engaged to be married and operating under a self-imposed one-beer, nine-o’clock curfew – was more than willing to extend them a hand.

The “two gets you three” scheme sounded harmless enough, because, heck, what’s a buck between friends when you’re about to hit the beach and party hearty! Still, as the “payday” characterization connotes, the money was due only a few weeks down the road when we were back at sea and receivables could easily be collected. And the annualized yield, as most of us investor types can easily calculate, was well in excess of 1,000% annualized. Well, there’s usury and there’s grand larceny, and my payday-hayday scheme was clearly in the latter category. The amounts were small – paychecks were only a few hundred dollars – but 200 compounded into 300, which turned into 450, 675, 1,000 – well, you get the picture. It didn’t take too many ports of call before Uncle Sam’s next payday became the property of Uncle Bill, and I became the financial godfather of the USS Wish I’d Never Enlisted. Read more»

Bill Meyer Show KMED with Will Reishman on 05/2010

Debt-Financed Everything

The truth behind California’s pension shortfall

Eric Fry, www.dailyreckoning.com, 05/24/2010

The forces that have been tormenting the financial markets were nowhere to be seen last Friday. Maybe they decided to take a long weekend. Whatever the case, the Dow Jones Industrial Average rebounded 125 points, several European markets produced modest gains and the euro advanced for the fourth straight trading session.

The financial market tormentors might also take Monday off, but we would expect them to return to work very soon. Friday’s upticks have a decidedly counter-trend feel to them. The problem, dear reader, is one of too much public debt and too little private capital.

“The Greek situation,” Bill Bonner remarked last week, “is not very different from the situation in dozens of other countries – including Portugal, Spain, Italy, Britain and the USA.

“America is unique…and just the same,” Bill continued. “It is already so deep in debt that even if you taxed 100% of Americans’ income, the resulting take wouldn’t be enough to cover the deficit…And if you cut the Pentagon budget by 100%, you’d still have a deficit too. It would take a remarkable act of political courage and discipline to put the US back on the path towards sound public finances. Read more»

The Federal Reserve System Must Be Abolished!

Gary D. Barnett, www.lewrockwell.com, 05/22/2010

We’ve all heard the talk but not enough have listened. Libertarians have hoped for the best, but have been left wanting. We’ve all watched while legislation to audit the Fed has been pushed aside, but considering our flawed political process, what other outcome was expected? The truth of the matter is this: The big-banking system in this country owns and controls the Congress, not the other way around, and the head of this banking system is the Federal Reserve. The head of the Federal Reserve System is the New York Fed. This is the progression; this is the problem!

Those who control the money control everything, including the government, and the full control of the monetary system in this country is in the hands of the Federal Reserve. With the abolishment of this system and a return to a sound money system backed by gold, we can look forward to more prosperity and freedom and a virtual end to inflation and business cycle booms and busts. In addition, without the power of the printing press, the tyrannical federal government will lose its teeth, and with this loss of power comes less war, less police state abuses, less forced welfare and entitlements, and a much more vibrant economy. Without the elimination of the Fed and a return to sound money, we will be left with economic turmoil, depression, wars and eventual collapse. Read more»

Have We Crossed the Point of No Return?

As Austrian business-cycle theory explains, the credit expansion of the fractional-reserve-banking system had caused an unsustainable boom. At artificially low interest rates, additional investment projects were undertaken even though there was no corresponding increase in real savings. The investments were simply paid by new paper credit. Many of these investments projects constituted malinvestments that had to be liquidated sooner or later. In the present cycle, these malinvestments occurred mainly in the overextended automotive, housing, and financial sectors.

The liquidation of malinvestments is beneficial in the sense that it purges inefficient projects and realigns the structure of production to consumer preferences. Factors of production that were misused in malinvestments are liberated and transferred to projects that consumers want more urgently to be realized. Read more»

The Post-Bubble Recriminations Ramp Up

Steve Saville, www.speculative-investor.com, 05/24/2010

Apart from the tiny fraction of the US population that understands economics, everyone was content while the private-sector credit bubble was inflating. The Fed chairman was hailed as a “maestro” for keeping interest rates at artificially low levels and thus ensuring that the prices of most investments — especially high-risk investments — remained on upward paths, while politicians of all stripes were happy that the market for home mortgages was the greatest ‘beneficiary’ of the Fed-sponsored inflation of money and credit. Actually, politicians didn’t leave much to chance, in that regulations were passed to encourage the provision of mortgage-related credit to anyone with a pulse and government-sponsored enterprises (Fannie Mae, etc.) worked tenaciously to increase both the supply of and the demand for mortgages. The banking industry played its part to the hilt by inventing new ways to expand credit (think: Residential Mortgage-Backed Securities and Collateralised Debt Obligations), but it is important to understand that the banks would not have had an incentive to create these new credit-related products unless there existed huge demand for such products. The demand came from large investors — hedge, bond and pension funds, for example — that were desperately searching for yield in a world where yields had been kept artificially low by various central bank and government manipulations.

The main problem with credit bubbles is that they result in a massive transfer of resources to activities that would not be economically viable in the absence of the artificially low interest rates and the monetary inflation. Consequently, although they temporarily create the feeling of prosperity, they deplete real savings and lessen the economy’s long-term growth potential. The recession or depression that inevitably follows the bursting of a credit bubble is caused by the ill-conceived investments made during the bubble rather than by the bursting of the bubble itself. Think of it this way: once the bubble bursts and the supply of new credit is curtailed, a light is suddenly shone upon the terrible mistakes that were made during the bubble.
Read more»

Doug Noland’s Credit Bubble Bulletin, www.prudentbear.com, 05/21/2010

[Weekly News Review - Selections]

May 19 – Bloomberg (Kathleen M. Howley):  “A record share of U.S. mortgages were in foreclosure in the first quarter as job losses caused homebuyers to fall behind on monthly payments… The inventory of homes in foreclosure rose to 4.63% from 4.58% in the fourth quarter… The combined share of foreclosures and mortgage delinquencies was 14%, or about one in every seven U.S. mortgages.”

May 21 – New York Times (Mary Williams Walsh and Amy Schoenfeld):  “In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year. It’s what the system promised, said Mr. Tassone, now 47… the cost of public pensions has been systemically underestimated nationwide for more than two decades, say some analysts. By these estimates, state and local officials have promised $5 trillion worth of benefits while thinking they were committing taxpayers to roughly half that amount.”

Read more»

Volcker Says Time Is Running Out for U.S. to Tackle Fiscal Woes

By Vivien Lou Chen - May 19, 2010, Bloomburg

Former Federal Reserve Chairman Paul Volcker, a top outside adviser to President Barack Obama, said time is “growing short” for the U.S. to address problems ranging from its budget deficit to Social Security obligation“We better get started,” the 82-year-old former central banker said in a speech yesterday in Stanford, California. “Today’s concerns may soon become tomorrow’s existential crises.”

Volcker, speaking hours after the euro fell to a four-year low against the dollar, said Europe demonstrates for the U.S. the hazards of “uncontrolled borrowing.” The European currency slid below $1.22 for the first time since April 2006 as a ban by German authorities on certain bearish investments fueled concern the region’s sovereign debt woes will worsen. Read more»

Fed to Blame for Gold Surge, Currency Woes: Ron Paul – CNBC

Published: Monday, 17 May 2010 | 10:07 AM ET

By: CNBC.com

As gold hits a succession of all-time highs and the euro struggles for mere survival, Paul said debt overloads at the base of the recent currency trends can be traced directly to the US central bank.

“The Federal Reserve behind the scenes has the power to create money out of thin air. It’s very bizarre,” Paul said. “They can bail out their friends and let the people they don’t like fail, and create a trillion dollars or more out of thin air in order to prop up some companies at the expense of others … It’s absolutely bizarre and, yes, the American people right now I think are waking up to it.” Read more»