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Smoking Some Bad Debt Dope?
All week, I've been watching the circus and clowns in Washington make fools out of themselves. The "debt ceiling drama" is annoying me. More smoke & mirrors to scare retail investors away while the big guns load up on risk assets. Let me go over a few key points to convince you to keep buying the dips hard and ignore the debt boogeyman which permeates our mass media every day.
First, take the time to read Peter Coy's article which appears on yahoo Finance (provided by Bloomberg Businessweek), Why the Debt Crisis Is Even Worse Than You Think. I quote the following:
The language we use is part of the problem. Every would-be budget balancer in Washington should read "On the General Relativity of Fiscal Language," a brilliant 2006 paper by economists Laurence J. Kotlikoff of Boston University and Jerry Green of Harvard University (available online from the National Bureau of Economic Research). The authors write that accountants and economists have something to learn from Albert Einstein's theory of relativity, about how measured quantities depend on one's frame of reference. Terms such as "deficit" and "tax," they write, "represent numbers in search of concepts that provide the illusion of meaning where none exists."
The national debt itself is one such Einsteinian (that is, squishy) concept. The Treasury Dept.'s punctilious daily accounting of it -- $14,342,841,083,049.67 as of July 25, of which just under $14.3 trillion is subject to the ceiling and about $10 trillion is held by the public -- gives the impression that it's as real and tangible as the Washington Monument. But what to include in that sum is ultimately a political choice. For instance, the national debt held by the public doesn't include America's obligation to make Social Security payments to future generations of the elderly. Why not?
Suppose that instead of paying Social Security payroll taxes, working people used that amount of money to buy bonds from the Social Security Administration, which they would redeem in their retirement years. In such an arrangement, the current and future cash flows would be identical, but because of a simple labeling change the reported debt held by the public would skyrocket. That example alone should generate a certain queasiness about the reliability of the numbers that are taken for granted by budget combatants on both sides of the aisle.
A more revealing calculation is the CBO's measurement of what's called the fiscal gap. That figure is conceptually cleaner than the national debt -- and consequently more alarming. Boston University's Kotlikoff has extended the agency's analysis from 2085 out to the infinite horizon, which he says is the only method that's invulnerable to the frame-of-reference problem. It's an approach used by actuaries to make sure that a pension system doesn't contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gap -- i.e., the net present value of all future expenses minus all future revenue -- amounts to $211 trillion.
Yikes! Douglas J. Holtz-Eakin, a former director of the CBO from 2003 to 2005, says he doesn't favor the infinite-horizon calculation because the result you get depends too heavily on arbitrary assumptions, such as exactly when health-care cost growth slows. But directionally, he says, Kotlikoff is "exactly right."
Which means we've been heading the wrong way for years. Even in the late 1990s, when official Washington was jubilant because the national debt briefly shrank, fiscal-gap calculations showed that the government was quietly getting into deeper trouble. It was paying out generous benefits to the elderly while incurring big obligations to boomers, whose leading edge was then 15 years from retirement. Now the gray deluge is upon us. As Holtz-Eakin, now president of the American Action Forum, a self-described center-right policy institute, says: "We're just in a world of hurt."
The U.S. is in danger of reaching a generational tipping point at which older Americans have the clout to vote themselves benefits that sap the strength of the younger generation -- benefits that can never be repeated. Kotlikoff argues that we may have reached that point already. He worries that the U.S. could become Argentina, which went from one of the world's richest to lower-middle income in a century of chronic mismanagement.
Senior citizens are being told by their own lobbyists, repeatedly, that any attempt to rein in the cost of Social Security and Medicare is an unjust attack on earned benefits. "Stop the liberals from raiding the Social Security Trust Fund once and for all!" says a recent mailing from the National Retirement Security Task Force. Similar messages aimed at Democratic voters make the same charge against Republicans. No wonder Obama and Boehner were rebuffed by their own parties for putting entitlements on the table. In the end neither the House nor the Senate debt-ceiling proposals touched Social Security or Medicare. Not pretty.
So is the US at risk of becoming the next Argentina or worse still, Greece? Of course not!!! This is all nonsense doctored up by the power elite to scare the masses into believing that the US economy is heading down a "path of fiscal destruction" so they can abdicate their duty to pay their fair share of taxes. I watch all these debates on television and think to myself "what a bunch of bullshit!"
On Friday, I spoke to my favorite fixed income senior portfolio manager/analyst at the Caisse -- a guy that PIMCO only wishes would be working for them. As far as brains go, he can take on Bill Gross and any other 'top gun' at PIMCO but he's too nice of a guy to work with sharks there or on Wall Street. He should be working for an elite global macro hedge fund but he's content where he's at and they value him (even though he's probably grossly underpaid relative to his peers at other large Canadian pension funds).
Anyways, this person confirmed a lot of my thinking on the US debt drama, namely, that most people don't have a clue of what they're talking about when it comes to public economics:
- On the 'balanced budget' proposal we both agreed that this is a stupid and dangerous proposal and President Obama would be nuts to accept it. Running government finances is not the same thing as running a family budget (thank God!). By law, states have to balance their budgets. When states need money, they go to the federal government. Why in the world would the US federal government -- the lender of last resort -- accept an economic straightjacket? "That's just stupid and would effectively mean the end of counter-cyclical fiscal policy and the end of the welfare state." I would go a step further and state that a balanced budget at the federal level would effectively kill the US economy for long time by posing serious economic, social and health risks. Only lunatics would accept such a proposal, ignoring the serious risks it actually entails.
- We both agreed that this "US debt crisis" is a political crisis, not an economic crisis. The lack of leadership in Washington is disconcerting. It's actually disturbing to see Tea Party representatives sticking to "their principles" with little or no concern as to the harm that a US default will cause not only in the US, but throughout the world. Already billions have been wiped off the stock market this past week, making a lot of investors poorer, but these politicians have no concern. Like religious zealots who think they will end up in heaven if they carry out their god's work, these lunatics are holding the US economy hostage. The only good thing from this entire messy debt debate is that it will set the Tea Party back years. On that front, Obama and his advisors are brilliant.
- As far as austerity goes, my friend and I are in full agreement. It's a disaster in Greece, it's a disaster in England, and it's pretty much going to be a total disaster everywhere else. My friend told me that the only place austerity worked was in Canada during the 90's but "that's because the economy was growing." Those of you who still cling to this silly notion that austerity works should take the time to listen to Michael Hudson at the end of my comment on the rottenness of the world.
- We both agree that the debt crisis is way overblown. The August 2nd deadline is not set in stone. "The cost of capital extending it by a week is zero but the stock market will likely slide further on uncertainty. In theory, the Fed could mint a trillion dollar 'platinum' coin and the US government will pay all its obligations." More importantly, we both agree that the real long-term issue for the US and other developed economies remains the jobs crisis. And the real unemployment scandal is how it's impacting certain minorities much harsher than others. Importantly, if you don't tackle the jobs crisis, the debt and deficit will only get worse.
- As far as Bill Gross and PIMCO, my friend chuckled at his advice to "short Treasuries" when yields were at 3.75%. "Anyone following his advice would have gotten killed, but to be fair to him, he has a fiduciary responsibility to his clients and won't reveal his true positions beforehand." Yields continue to fall as the US economy slows and flight to quality reigns as global investors remain jittery.
- In Europe, my friend sees this as a long, drawn out mess where yields will gyrate widely over the next year. He joked: "the way spreads are moving, BCA Research should start a new publication call the European Fixed Income Weekly."
- Finally, my friend thinks universities across the world should "burn standard economics textbooks." Having graduated from McGill University with an M.A. in Economics, I'm somewhat in agreement but also recognize that some of the greatest social thinkers of the 20th century were brilliant economists like Keynes, Hicks, Hayek, Fisher, Friedman, etc. The problem isn't economics, it's what they're teaching students, ignoring a rich history of economic thought (too much mathematics and programming, not enough economics and history!)
I leave you with an excellent roundtable discussion from ABC's This Week (entire show is worth watching online; watch both parts of roundtable discussion below). Pay close attention to what Paul Kruman and Mohamed El-Erian are saying. Cutting spending now will only exacerbate the jobs crisis and will make things much worse. In my opinion, Krugman is wrong about targeted cuts to the federal government, but he's absolutely right that the Obama administration has basically pandered to the Republicans and caved into every one of their demands.
As I stated before, the world is sinking into a hellhole. We have incompetent fools running our governments, major corporations, banks and yes, alas, our public pension funds (with a few exceptions). It's a total disaster but remember this: the power elite need to continue making profits. These sociopaths will stop at nothing to extend and pretend, which is why I'm not worried about this entire "debt crisis debacle" and keep buying the dips on risk assets. And lo and behold, as I wind down my comment, Bloomberg reports that a deal framework has been reached on raising the debt ceiling. Relax, it should be a great week in the stock market. :)
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Leo may be a poor sport ( he is not ALONE on ZH) but I got a good laugh at his go fuck yourself sign. Doesn't take much to get me to laugh.
Oh I can take the heat, red hot solar stocks, BACKING UP THE TRUCK NOW!
You won't be able to fit much into that Tonka of yours.
Or have you graduated up into the Big Wheel already?
"Red hot solar stocks" being ramped, and Leo is "backing up the truck" ..Doh! . . get ready for a collosal crash next week, Leo will look awesome as roadkill
ZG, you're such a moron! Get ready for the Mother of All Short Squeezes whichis going to wipe suckers like you off the map!!
Yes, you keep playing in that hopelessly corrupt, rigged and Fed-supported casino that masquerades as a stock market, leo --- and we will laugh as you lose your shirt when it all comes crashing down, which is inevitable.
As Wall Streeters like to say among themselves: 'leo and RobotTarder: the other white meat."
akak - dude, you rule!
Leo is sitting in the corner, fingers in his ears, knees pulled to his chest, rocking back and forth humming right now. I'll bet that back in the day old Leo was shouting from the mountaintop that AOL was going to $1,000 a share...buy now!!
"Money never sleeps, Bud" :)
Yep because this time is different...
Okay got it...
C'mon people, if you've been reading Leo's stuff you know he is a fucking idiot, so why all the surprise?
Insert..."C'mon people" now...
http://www.youtube.com/watch?v=cw2ze1Iw9d0
It's still perversely kind of amusing to see our little leo dig himself ever deeper into the hole of Keynesian non-credibility and insanity which he continues to furiously excavate, one presumes in the vain hope of one day finding, in its infinitely deep depths, the corpse of his hero John Maynard.
The only perverse thing here is that fools like you can actually post comments. There should be a minimum IQ threshold, would wipe all you tea bagging scumbags off this site for good.
Leo, now you're even starting to piss me off. It looks like it is pretty easy to bait you into a high blood pressure stroke. Why don't you and all the other big swaggering dicks on ZH go piss on each other someplace else.
One of these days TPTB here on ZH will realize that your tone throughout your articles and your immaturity in the comments sections reflects negatively on the site and we'll be done suffering through your baseless conclusions, which you defend hysterically and with the maturity of a 12 year old.
Gene, while you are absolutely correct that Leo's childess, imature tone amounts to nothing more than the same cheerleading we see from other ignorant "sheeple" and "useful idiots", I adamently disagree that ZH should stop posting Leo's drivel. Leo is a poster child for all that is wrong with American media including mainstream business media like the WSJ, etc. Reading Leo helps us all see into the soul of the dreamers, wishers, and hopers who prefer to ignore financial facts because it disagrees with their socialist and/or selfish goals. Leo is a wannabe money manager, so naturally it is in his interests to see the market "go up" regardless of fundamentals or the damage it causes to average hard working Americans who just want to save a few dollars because they do not want a corrupt system to dicate every facet of their lives. For Leo, particularly since he is canadian and doesn't have to suffer the same debasement and pillaging of responsible U.S. citizen savings, he is simply looking out for his own interests much like the criminals in New York, big banks, big goverment, etc., who love to spend other peoples money and steal their labor. Leo is not smart enough to realize that what the Fed, the U.S. government, and big banks are doing is punishing hard workers and savers in order to enrich themselves----even if Leo were smart enough to realize that, it simply does not matter to him because his interests are aligned with the criminals that do the stealing.
I am also confident that Leo likely doesn't realize that the stocks they he so loves are really nothing more than the equivalent of the Fed printing presses. When corrupt corporate execs, which compose 99.99% of all U.S. corporations, want money they simply manipulate earnings and "print" stock options and generously award themselves. Insider selling has been setting records for years, but if it wasn't the fact is the only people that make money off of public companies are corrupt execs who award themselves shares, their friends, and of course the government. Between this theft of shareholder value and the giveawyas to unions and other corrupt special interests, there is nothing left for the real owners of most public companies. Yet, despite the theft by execs of these companies, people like Leo do nothing but cheerlead the companies and come up with a multitude of ways to "value" the company to suit their needs. For intelligent, critical thinkers who can understand economics 101 and finance 101, it really is quite comical, yet terrifying, that the mainstream media and useful idiots like Leo are able to swindle the average investor into putting their money into the most corrupt ponzi scheme ever devised by mankind.
In the end, look at Leo's diatribe's as a positive---by seeing into the soul of a useful idiot, you can better understand how the criminals are able to convince idiots like Leo to continue pumping their money into the fiat ponzi scheme. We would all like to believe that at some point sanity will return and true capitalism will work, however, every second another "Leo" is born, and for every enlightend person that recognizes the corrupt system for what it is, another 10 Leo's are born, and Leo is simply counting on the fact that most people are retarded and will not recognize the corrupt financial system for what it is----a legalized form of theft designed to separate hard working people from their money. Leo may never get his socialist tax system, but he knows that as long as the mainstream populace buy into the corrupt fiat ponzi scheme casino, he and his heros can steal the money via fiat inflation and the casino. In the end, all Leo cares about is getting something for nothing, redistribution, and screwing hard working people who are doing nothing more than trying their best to be independent of a corrupt, marxist/socialist system where the irresponsible are rewarded at the responsibles expense. In other words, if you do not agree that the government, big banks, and corporations should have the right to legally steal and pillage your hard earned money, you are a righ wing extremist tea bagger. Yes, anybody out there who does not think that big banks and the government should dicate all facets of our life while corporate execs steal what is left, you are a terrorist right wing tea bagging nut job. In the end, that really is all Leo is saying and you can confirm that by reading his comments. He hates people who do not believe that big government should run our lives, that big banks should steal our savings, and that corporate execs should have the right to debase shareholder value by printing themselves stock options and distributing the rest to employees. In other words, Leo loves capitalism as long as the little guy gets nothing.
Hate Leo if you want but don't ban him-----everyone that cares about their money needs to understand both the criminal minds that run our casino and the sheeple that so glorify it.
Dear WSP,
I think just fell in love with you!
Seriously, though, what an OUTSTANDING analysis of the crawling, complicit, bootlicking, cowardly, utterly venal and amoral Quislings epitomized by leo. Truly an excellent condemnation of him and his ilk, who are sadly far and away the majority in our degenerating societies today.
Well said WSP, +1
For anyone like me who has witnessed turning points in history Leos analysis is on par with the CIAs analysis that said the Soviet Union would not collapse or there would be no Tet offensive etc etc. In the end what the US politicians have done is to shake everyones faith in the financial stability of the USA, there are many moments in history like this, I'll pick two to illustrate the point.
Gerald Ratners infamous speech to quote
"We also do cut-glass sherry decanters complete with six glasses on a silver-plated tray that your butler can serve you drinks on, all for £4.95. People say, 'How can you sell this for such a low price?' I say, because it's total crap."
Here's the video (click the Video tab)
http://www.speakerscorner.co.uk/file/fb549a72ceb551f3254265b3c7268a3c/ge...
Nicolae Ceausescus last speech, where the crowd booed and heckled him, and that was the beginning of the end for him.
http://en.wikipedia.org/wiki/Nicolae_Ceau%C8%99escu#Overthrow
Video here
http://www.youtube.com/watch?v=Pm53beoUZ4Q
leo: thank you for demonstrating once again the absurdity, irrationality and outright insanity of the typical statist, status-quo defender.
oh yeah...pass that debt joint over here my friend..............
oh yeah...pass that debt joint over here my friend..............
Why have a debt ceiling law if no one pays attention to it ? Why for that matter have a Constitution if you can willy nilly decide to re-interpret it anytime you do not agree with it, just find a judge. We have to be adults here and stop the spending. There is plenty of waste in the Fed gov't to cut without going fro a 10% across the board cut in spending. We could easily get along without the Dept of Ed, Homeland Security, Agriculture, and even Energy since we have no energy program or policy. Next get the the hellout of wars overseas. We shed American blood and spend hard earned money for tribalist cultures overseas. We do not even get a drop of oil in gratitude for their "freedom". We must cut back on the welfare state. As it is, over half the population pays no income tax, add on the near term retirement of the Woodstock generation and then think as you did, that they can then vote themselves more entitlement premiums....where does it ever end...ah..a Euroid welfare state...we can then join up and sing kumbya with the rest of the world socialist state. No thanks.. If congress cannot see the way to controlling itself it behooves the populace to institute a balanced budget approach to finances. I just do not see why the Fed gov't is not like me keeping a sound checkbook. Second, the debt crisis is BOTH a political one and financial one. Political in the sense that both parties spend like drunken sailors to buy votes from constituents and backers (like banksters and lobbyists) for their re-election, and financial as in spending this country into oblivion, Where's my "money tree" ??? I sure as hell wouldn't buy stock in the USA after seeing the "Accounting statement". The "Tea party" has started a process where we actually will hold the Feds to account. We must rein in the unlimited Federal government and force it to live within it means, just like the citizenry. STOP the spending !!!! Term limits for congress, balanced budget if you can't keep the wallet in your pants.
Laurence J. Kotlikoff doesn't understand that the Intertemporal Government Budget Contstraint is wrong. It's based on wrong thinking.
that video is gone: "listen to Michael Hudson at the end of my comment on the rottenness of the world" it's been taken down from youtube for multiple copyright infringements. Oh well.
Pico, I just fixed that, thx.
The empire and it's co-dependents are in the midst of inflection. It is real and it should be sobering and irritating and emotional. Stress inhibits logic. That said, the idea that self-immolation is beneficial or corrective on any level is lunacy.
Ideologues seldom benefit the state of humanity but they keep coming with all creeds and colors. The violent fight for preferred abstraction goes on without an end.
I see evidence that rodents and insects are successful biologically and will continue that trend. How about those homo sapiens though?
Leo, I don't comment here often, preferring to watch you get poleaxed from afar but your points are so fucking stupid I had to write.
Answer me this: if debt and debt limits don't matter, why keep track of any of it? Seriously. I'd like an answer. Why even print how much the government is borrowing or spending or taking in? Who cares? None of it matters, according to your logic.
Secondly, why do any of us pay ANY taxes at all? Why can't the government just whip up all the 'money' it needs for everything? Why only whip up 40% of it?
I'd love to hear your answers.
Oh - and how are those solar stocks doing, dipshit?
Coming Down,
taxes give the initial demand for the medium of exchange.
the intertemporal government budget constraints - the idea the government needs to balance its budget in it's fiat currency - is wrong.
It's based on a logical flaw.
http://wp.me/p1b5Ih-o9
So the only things we have to worry about are inflation and unemployment, not insolvency.
Listen douchebag, if you can rub two pennies together, buy solars, select tech and materials NOW! Here are some symbols for you: DQ, EMKR, LVLT, SATC, JNPR, JDSU, LDK, DAN.V. Will spoonfeed your sorry ass some more next week. As for debt limits, it's all nonsense so pay your fucken taxes and STFUP!!!
I'll be happy to watch these stocks and see if they pay. Leo failed as a pension manager, let's see how he fares as a trader.
Eat shit and die already, you pathetic, power-pandering piece of human filth. leo, you are NOTHING but a laughingstock and a sick joke.
And as for your puerile, pubescent, para-pornographic postings, they just reemphasize your moral and intellectual bankruptcy here.
akak, bet you never stuck your tongue or anything else up an ass like Dimitra's. Only in your wildest dreams....LOL! EISAI MALAKAS!
Please Leo, my sister's name is Dimitra.
Being Greek, leo is probably more interested in your brother Dimitri. All those Greek soldiers don't wear those cute little white skirts for nothing!
And, I rest my case.
Seriously, grow up already --- you talk and act like an immature, pimply, socially inept 16 year-old, who knows he is never going to get any action outside of internet porn.
LOL, I've seen more action in the last week than you've seen in a lifetime. And spanking your monkey doesn't count! LOL!
STILL waiting for an answer to my two questions. Do you have one? If not, please admit it so I can completely dismiss you once and for all.
Also, I have been on this site a long time - almost from the start. I have watched you tout solar over and over. You sound like a Cubs fan with your "just wait til next year!"
The fact is they have gone nowhere. They are especially underwater from the highs where you were STILL shouting "buy" from the rooftop.
My gold and silver, on the other hand, have done very well. You were outsmarted by a lump of metal. Congrats.
Oh my God --- BEST comeback of the day! I'm still laughing!
Although to be fair, in a battle of the wits, a box of rocks would beat the socks off leo any day as well.
Lemme guess: she's a model, but none of your friends have ever met her because she lives in Canada.
You should ring the bell on one of your hot stocks, take a red-eye to Reno and get your cherry popped, old buddy. One caveat, however, the Bunny Ranch doesn't take IOUs.
LOL, have you ever been to Montreal, douchebag? I've "popped my cherry" hundreds of times with French Canadian hotties that make those old Las Vegas hags at the Bunny Ranch (how frigging tacky!) look like shit.
Typically, I find that people who don't know what the term "popped my cherry" means (as evidenced by the statement that they've done so "hundreds of times") are people who haven't...just sayin'
Which leads to the follow-up point that, if you haven't by now, I'm afraid the only way it's going to happen is if you pay for it. If you stick with those solar outfits long enough, the only thing you'll have enough cash to be in the market for is a gum-job, in the alley out behind the bodega, from one of the toothless ghetto crack whores.
And seriously? Montreal? Are you fucking kidding me? Why the hell would I go to some desolate socialist rat hole like that? Besides that, with the exchange rate these days, who the hell can affford Canada?
You need some meds, amigo. And an education might not hurt, either.
Your apparent level of sophistication, elan and maturity leaves me, shall we say, underwhelmed.
Outstanding points to ponder, Coming Down --- not that you should expect little leo to answer them, because of course he cannot logically do so.
For the last time, leo, just shut the fuck up already. You have no business sullying this website, other than perhaps providing us with another Keynesian idiot to mock and ridicule.
AKAK, I only read Leo's posts to learn what lefty socialist Keynsians are thinking, and to laugh my ass off when you hammer Leo for his nonsense. Your replies are great. Sorry Leo, but your posts are valuable to me for the deficient economic viewpoint and nothing else. For that I thank you, also the girls are awesome.
Thanks SamMav!
Yes, reading and responding to leo's infinitely insulting nonsense and bullshit is a filthy and mostly thankless job, but somebody has to do it --- like taking out a particularly odious bag of trash.
"I'd love to hear your answers."
Good luck with that.
Leo seems to think unlimited printing, which devalues everyones labor, is some sort of Grecian panacea. No consequence at all, outside of keeping the riff raff out his favorite eating/drinking establishments and forcing more & more of them into the welcoming arms of the welfare state.
He is still grinding on why we need taxation of anyone with a 24/7 printing press to back his deficit spending...but I suppose he'll come up with some Keynesian idea of full blown state control that hasn't been presented as of yet.
As we all know, Keynes himself said his "theory" is more suited to an authoritarian type government than a free one.
I need a vacation in the Greek isles! :p
Tame Comatose compared to Patpong
Jesus man, that looks like a nightmare, all those preening chimps shaking they're genitals at one another, what are you even suppsed to do there...walk around hiding your boner?