Tax Revenue

Back in 1978, the Chinese politburo enacted the "one-child policy", whose main purpose was to "alleviate social, economic, and environmental problems" in China as a result of the soaring population. According to estimates, the policy prevented more than 250 million births between 1980 and 2000, and 400 million births from about 1979 to 2011. And while not applicable to everyone, in 2007 approximately 35.9% of China's population was subject to a one-child restriction. Regardless of the numbers, things are about to change: with the Chinese economy now having peaked and suddenly finding itself in rapid deceleration with excess credit growth providing virtually no boost to marginal growth, the Chinese government is forced to reexamine 35 years of social policy in order to extract growth from the one place where for nearly 4 decades it had tried to stifle: demographics.  According to the 21st Business Herald which cited sources close to the National Population and Family Planning Commission, China may relax its one-child policy at end-2013 or early-2014 (read end) by allowing families to have two children if at least one parent is from a one-child family.

Without doubt, Iceland was the canary in the coalmine for the sovereign debt crisis that is unfolding across the world right now. Today, Iceland is held up as the model of recovery. 'Famous' economists like Paul Krugman praise the government for rapidly rebuilding the economy without having to resort to austerity. This morning’s headline from The Telegraph newspaper sums it up: “Iceland has taken its medicine and is off the critical list”. It turns out, most of these claims are dead wrong. Despite being so widely reported by the mainstream financial media, Iceland is not a story of model economic recovery. It’s a story of how to fool people. And for now, it’s working.

It is so sad to watch one of America's greatest cities die a horrible death.  Once upon a time, the city of Detroit was a teeming metropolis of 1.8 million people and it had the highest per capita income in the United States.  Now it is a rotting, decaying hellhole of about 700,000 people that the rest of the world makes jokes about. Detroit is only just the beginning.  When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before. All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading.  We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically. We have been living way above our means for so long that we think it is "normal", but an extremely painful "adjustment" is coming and most Americans are not going to know how to handle it. So don't laugh at Detroit.  The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.

"Things are different now. I’ve turned my savings into spending, rung up thousands of dollars’ worth of purchases on my credit cards and in the process paid a lot more in taxes. And I’ll probably keep spending like this until I nearly run out of money. In other words, I’ve bought a house. Since the recession materialized in 2008, policymakers in Washington have been urging Americans to buy homes, because no single purchase does more to generate economic activity. The housing market and everything associated with it accounts for around one-sixth of the entire economy, which is why a housing bust can drag the whole nation into a recession (basically what happened starting in 2007) while a housing boom can make nearly everyone better off, including people who don’t even own homes."

Congress: "Is it fair to say that Wall Street has benefited more [from QE] than Main Street has?"

Bernanke: "I don't think so... I want to emphasize that we're very focused on Main Street... Our low interest rates have created a lot of ability to buy automobiles..."

"For years, the City has spent more than it takes in and has borrowed and deferred paying certain obligations to make ends meet. The City is insolvent" - Kevin Orr

Presenting default you can believe in, as the largest municipal bankruptcy in US history, involing the one-time iconic "motor city" which now has a population of 700,000 and some $20 billion in liabilities, is about to become reality. But fear not: the Detroit bankruptcy, like rising rates, are entirely due to the economic recovery.

The odds of an out-of-court settlement between Detroit's emergency manager and its creditors are "extremely slim," as the WSJ reports that the troubled city's D-Day draws ever closer to becoming the largest muni default in US history. The last straw on Detroit's camel's back of bankruptcy was following discussions last week between Kevyn Orr (Detroit's emergency manager) and the White House as any hope of a federal bailout to evert bankruptcy fizzled. Folowing Detroit's default in June - demonstrating its insolvency - and its "negotiations in full faith" with creditors set the scene for a pending day in court. The current plan (for now rejected by creditors) means a 90% loss for muni-worker retirees, 81% loss for unsecured creditors, and a 75% loss for secured creditors leaving a "free fall" bankruptcy filing - one without a clear plan or much agreement beforehand with creditors - the most  likely outcome "because there is no other way out of here if we don't reach consensus."

Prepare for the big freeze. 

As noted yesterday, and perhspa even more prescient now Anastasiades is back with the begging bowl, the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter for two reasons: 1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises. 2. The official Eurozone resolution of the crisis may provide a template for future resolutions of other banking/debt crises. It also matters for another reason: not only is the bail-in a direct theft of depositors' money, the entire bailout is essentially a wholesale theft of national assets. This is the inevitable result of political Elites swearing allegiance to the European Monetary Union.

With the meaningless focus on such distracting noise as daily POMOs, will/won't the Fed taper, how many shorts will the Fed's Markets desk squeeze today, and how massive will the second Fed housing bubble be, it is easy to lose sight of the big picture, namely just where is the debt juggernaut that is the US, heading? Conveniently, the US debt clock has a "time machine" function that extrapolates, at current rates of change, what the key metrics behind the US economic facade will look like.

The New Deal social insurance philosophers thus struck a Faustian bargain... To get government funded pensions and unemployment benefits for the most needy, they eschewed a means test and, instead, agreed to generous wage replacement on a universal basis. To fund the massive cost of these universal benefits they agreed to a regressive payroll tax by disguising it as an insurance premium. Yet the long run results could not have been more perverse. The payroll tax has become an anti-jobs monster, but under the banner of a universal entitlement organized labor tenaciously defends what should be its nemesis. The puzzling thing is that 75 years later - with all the terrible facts fully known - the doctrinaire conviction abides on the Left that social insurance is the New Deal’s crowning achievement. In fact, it is its costliest mistake.

In the 15th century, the highest standard of living in the world belonged to China. Places like Nanjing had reached the pinnacle of civilization with incredibly modern infrastructure, robust economies, substantial international trade, great healthcare, and a rising middle class. If you had told a Chinese merchant at the time that, over the course of the next several hundred years, global primacy would shift to Europe (and a relatively unknown American continent), you would have been laughed at. It was simply unthinkable given how advanced China was over the west. And yet, it happened. Ironically, the tables are turning yet again; in total objectivity, the patient is beyond cure at this point… and the math is quite simple. Nations typically enter this vicious cycle once they start having to borrow money just to pay interest on what they already owe. The US is already way past this point.

Anytime a free market guy rails against central planning and socialism, there is always someone who stands up and says “what about Sweden?” Ah, Sweden... a socialist’s paradise... a place where taxes are among the highest in the world, few people are wealthy, and the government is involved in people’s lives from cradle to grave. And in all of these government surveys on ‘happiness’, places like Sweden, Norway, and Denmark consistently rank among the happiest countries in the world. Well… the veneer is cracking. The riots we first noted here continue and these foru charts may offer some of in the incendiary material for why. As we noted recently, the benefits that have kept Europe relatively 'social-unrest-free' so far are starting to run dry. People in North America who are rapidly being dragged into a welfare state should pay very close attention... because this is the future that awaits.

At the height of the financial crisis (i.e. 2008) it was easy to despise just the bankers for their serial and colossal ineptitude and rank hypocrisy. Now, five years into one of history’s most alarming bubbles, it’s easy to despise just about everyone in a position of financial or political authority, and for the same reasons. The real black comedy lies in the manipulation of market prices that is now endemic throughout the global financial system. As Japan is now showing, even with the unrestrained commitment of a central bank and its magical powers to create money out of nothing, there are practical limits to market rigging activity. Last week’s price action within the Japanese government bond market and stock market suggests that both of these markets are in the early stages of shaking themselves to pieces. The fallout of unintended (counter-intended ?) consequences from massive market manipulation will be awesome.