The next, worse financial crisis
Commentary: Ten reasons we are doomed to repeat 2008
By on Start Here ! in the START HERE !! at Are You Prepared For The Coming Economic Collapse And The Next Great Depression?
Wall Street is hit by another round of layoffs. What will a post–Dodd-Frank Wall Street will look like?
1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere? I’d laugh, but tens of millions are being suckered into this piece of spin, which is being pushed in order to provide cover so the real culprits can get away. And it’s working.
2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.
3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again. Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail” and limited liability, they are paid to behave recklessly, and they lose little — or nothing — if things go wrong.
4. The referees are corrupt. We’re supposed to have a system of free enterprise under the law. The only problem: The players get to bribe the refs. Imagine if that happened in the NFL. The banks and other industries lavish huge amounts of money on Congress, presidents and the entire Washington establishment of aides, advisers and hangers-on. They do it through campaign contributions. They do it with $500,000 speaker fees and boardroom sinecures upon retirement. And they do it by spending a fortune on lobbyists — so you know that if you play nice when you’re in government, you too can get a $500,000-a-year lobbying job when you retire. How big are the bribes? The finance industry spent $474 million on lobbying last year alone, according to the Center for Responsive Politics. Click to Play
High-frequency trading: good for you
New research shows that high-frequency trading firms add liquidity to markets and smooth out volatility.
5. Stocks are skyrocketing again. The Standard & Poor’s 500 Index /quotes/zigman/3870025 SPX +1.05% has now doubled from the March 2009 lows. Isn’t that good news? Well, yes, up to a point. Admittedly, a lot of it is just from debasement of the dollar (when the greenback goes down, Wall Street goes up, and vice versa). And we forget there were huge rallies on Wall Street during the bear markets of the 1930s and the 1970s, as there were in Japan in the 1990s. But the market boom, targeted especially toward the riskiest and junkiest stocks, raises risks. It leaves investors less room for positive surprises and much more room for disappointment. And stocks are not cheap. The dividend yield on the S&P is just 2%. According to one long-term measure — “Tobin’s q,” which compares share prices with the replacement cost of company assets — shares are now about 70% above average valuations. Furthermore, we have an aging population of Baby Boomers who still own a lot of stocks, and who are going to be selling as they near retirement.
6. The derivatives time bomb is bigger than ever — and ticking away. Just before Lehman collapsed, at what we now call the height of the last bubble, Wall Street firms were carrying risky financial derivatives on their books with a value of an astonishing $183 trillion. That was 13 times the size of the U.S. economy. If it sounds insane, it was. Since then we’ve had four years of panic, alleged reform and a return to financial sobriety. So what’s the figure now? Try $248 trillion. No kidding. Ah, good times.
7. The ancient regime is in the saddle. I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”? (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)
8. Ben Bernanke doesn’t understand his job. The Fed chairman made an absolutely astonishing admission at his first press conference. He cited the boom in the Russell 2000 Index /quotes/zigman/2759624 RUT +1.52% of risky small-cap stocks as one sign “quantitative easing” had worked. The Fed has a dual mandate by law: low inflation and low unemployment. Now, apparently, it has a third: boosting Wall Street share prices. This is crazy. If it ends well, I will be surprised.
9. We are levering up like crazy. Looking for a “credit bubble”? We’re in it. Everyone knows about the skyrocketing federal debt, and the risk that Congress won’t raise the debt ceiling next month. But that’s just part of the story. U.S. corporations borrowed $513 billion in the first quarter. They’re borrowing at twice the rate that they were last fall, when corporate debt was already soaring. Savers, desperate for income, will buy almost any bonds at all. No wonder the yields on high-yield bonds have collapsed. So much for all that talk about “cash on the balance sheets.” U.S. nonfinancial corporations overall are now deeply in debt, to the tune of $7.3 trillion. That’s a record level, and up 24% in the past five years. And when you throw in household debts, government debt and the debts of the financial sector, the debt level reaches at least as high as $50 trillion. More leverage means more risk. It’s Econ 101.
10. The real economy remains in the tank. The second round of quantitative easing hasn’t done anything noticeable except lower the exchange rate. Unemployment is far, far higher than the official numbers will tell you (for example, even the Labor Department’s fine print admits that one middle-aged man in four lacks a full-time job — astonishing). Our current-account deficit is running at $120 billion a year (and hasn’t been in surplus since 1990). House prices are falling, not recovering. Real wages are stagnant. Yes, productivity is rising. But that, ironically, also helps keep down jobs.
You know what George Santayana said about people who forget the past. But we’re even dumber than that. We are doomed to repeat the past not because we have forgotten it but because we never learned the lessons to begin with.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
Rob Brown, a professor of actuarial science at the University of Waterloo, past president of the Canadian Institute of Actuaries and currently an expert adviser with EvidenceNetwork.ca, wrote an op-ed piece for the Winnipeg free Press, Why the fuss over pensions:
Two of Canada's largest unions (Air Canada and Canada Post) recently went on strike to save their defined-benefit pension plans against the wishes of the employer to switch new employees to defined-contribution plans.
What are these plans all about and why all the fuss?
As the name implies, a defined-benefit pension plan promises to pay you a defined benefit when you retire. This can be a flat benefit (you get a pension that pays $1,000 a year in retirement for every year of employment -- if you have 30 years of service you get $30,000 a year). Or it can pay out a percentage of your salary just prior to retirement (you get a pension that pays 1.5 per cent of final average pay for every year of employment -- 30 years of service yields 45 per cent of your final average pay).
So, in a defined-benefit plan, you know what annual benefit you will receive in retirement and you have a good idea of how much more you need to save on your own to be fully secure. The risks of a defined-benefit plan are carried by the employer (although, in the long term, higher pension costs could force wages down). The present environment packs a triple whammy of bad news for these employers.
First, interest rates are very low, so the value today of retirement income to be paid many years in the future is not as significantly discounted (e.g., at four per cent versus eight per cent). Second, because of the financial crisis of 2008/09 and the mediocre recovery, pension plan assets are worth less than they were expected to be and pension plans are in the hole -- they owe more money to employees than they have in the plan (Air Canada has a $2.1-billion deficit while Canada Post's is $3.2 billion). Third, people are living longer and this means they collect pensions longer and company costs go up.
Adding to the concerns is the ratio of retirees to active workers that is now about one-to-one at both Air Canada and Canada Post.This matters, because the cash flow needed to pay benefits must come from worker contributions and investment returns. With the growing ratio of retirees to workers, the plan becomes more dependent on investment returns that are low today.
In these defined-benefit plans, the worker has a defined benefit and increased costs are the responsibility of the employer. This is bad news today but if the economy improves, good times for the employer could return.
The opposite is true for defined-contribution plans. Again, as the name implies, in a defined-contribution pension plan, it is the contribution that is defined with no commitment to how much will be paid out in retirement.
For example, the plan may provide that the employer will contribute $1 to the pension plan per hour of work. Or it could state that the employer will contribute five per cent of an individual's pay into the plan.
Once the employer makes the contribution, however, that is the end of the employer's responsibility. If the stock market crashes or interest rates on investments are low, the worker will have a lower asset pool at retirement and, thus, lower retirement income.
The worker, therefore, has no idea until very close to retirement what income to expect and how much more to save. Just imagine the difference between retiring in 2007 versus 2009.
It is also true that, even if investments work out as hoped for, the new defined-contribution pension plans being offered by Air Canada and Canada Post should not be expected to result in benefits as large as the defined-benefit plans they want to close.
For the level of benefits now promised to Air Canada and Canada Post workers, employer contributions in excess of 10 per cent of pay would be expected in today's climate. One would not anticipate the new defined-contribution plans being that rich.
So, the benefits being negotiated are important and real. Management will continue to attempt to pass the pension risks over to the workers by using defined-contribution plans and workers will work equally hard to retain their defined benefits.
That's the reason for all the fuss.
Indeed, that's the reason for all the fuss about pensions. Workers want to maintain their current defined benefit plans, but employers are telling them "we can't afford it so get used to the idea of defined-contribution plans."
In an op-ed to the Montreal Gazette, Bill Tufts, an employee benefits consultant and the founder of Fair Pensions for All, an organization devoted to public-sector pension reform, warns that the an unsustainable pension gap is growing:
The Gazette's July 4 editorial, "City hall is right to get tough on pension funds," applauded proposals from the city of Montreal to take steps to control its growing pension obligations.
Montreal's problems with public-sector pension affordability are being mirrored in the rest of Quebec and indeed the entire country. Canada has become a land of pension haves and have-nots. There is a growing gap between public-sector-employee pension benefits and taxpayers who fund those generous goldplated pensions but don't have one of their own.
The Gazette reported that the average police officer in Montreal is retiring at age 53 with a $59,000 annual pension. The average Canadian, by comparison, has only $60,000 saved in his/her RRSP.
The police officer will collect a pension every year for the rest of his/her life, worth an estimated total of about $2.6 million until age 84. The way things are set up, many public-sector workers will collect more income in retirement then they earned during their working careers. This pension gap has been growing over the past 30 years and has now reached a level that is unsustainable economically, politically and socially. Taxpayers are being shortchanged and, without reform, things are only going to get worse.
In an upcoming book that I am co-writing entitled Pension Ponzi, will show how the Canadian government and hence taxpayers have gone into serious debt to fund this significant transfer of wealth into public-sector pension plans.
Those who favour the status quo like to point out that public-sector employees deserve their plans because workers pay into them. They are only reaping what they have sowed, in other words. But this is a very weak argument.
Take Hydro-Québec as an example. In early 2009, the utility implemented a questionable accounting concept called pension smoothing that "smoothed out" or spread out over a number of years the $3.1-billion pension loss that it incurred in 2008.
Pension smoothing allows Hydro-Québec to present a picture of its pension situation that underestimates the problems it is facing.
Hydro's accounting manipulation only postpones the necessary reforms that will ultimately be required to keep the plan afloat over the long term.
Where pension smoothing was tried in San Francisco, the public defender said: "It is like telling your spouse that you lost only $500 in Las Vegas instead of the $5,000 you actually lost, because you are spreading your losses over 10 years."
A fairer estimate of the cost to taxpayers is to look at the actual cash pumped into the Hydro-Québec pension plan. As the accompanying graph shows, the utility has had to pump $869 million in special contributions into the plan from 2008 to 2010 to help boost the assets.
Reforming public pensions will not be easy. In the United Kingdom last week, close to 750,000 public-sector employers protested on the streets against raising the retirement age for public-sector workers to 66 from 65. In Canada, public-security workers can retire as early as age 50, with the rest of the public sector eligible to retire at age 55.
Montreal municipal pensions are particularly expensive for taxpayers because the concept of final average salary is used to calculate benefits. This means that the average of the highest three, or five, years of salary earnings is used to calculate the pension benefits (typically equal to 70 per cent of that average). Part of the U.K. pension reform would see a move toward calculating benefits based on career average salary. This needs to be done here in Canada as well.
We should also be looking at moving toward hybrid pensions. In a hybrid plan, the employer's pension contributions go into a traditional defined-benefit plan, while the employee's contributions fund a defined-contribution plan.
This way, any future shortfalls in the plan after the employee retires do not necessarily fall solely on the shoulders of taxpayers.
Taxpayers need to fight hard for public-sector pension reform. Too many taxpayers without pensions of their own are being asked to pay too much money out of their own pockets to finance the pensions of public-sector workers.
THE HEAVY BURDEN OF HYDRO-QUÉBEC PENSIONS
Pension benefits paid out by Hydro-Québec grew by almost 50 per cent from 2006 to 2010 - from $420 million to $602 million. From 2008 to 2010, the utility has had to pump $869 million in special contributions into the pension plan to help boost its assets going forward.
Hydro-Québec pensions: contributions and benefits
2006 2007 2008 2009 2010 Total
Employee contributions $54 million $66 million $84 million $118 million $120 million $442 million
Hydro regular contributions $319 million $5 million $291 million $295 million $296 million $1.206 billion
Hydro special contributions $62 million 0 $149 million $370 million $350 million $931 million
Pension benefits paid out $420 million $460 million $510 million $551 million $602 million $2.543 billion
Compiled from Notes 20, 21 on Future Employee Benefits -Annual Reports:
Tuesday’s blog and Wednesday’s column on Keith Horner’s proposal for a National Defined Benefit pension plan grafted on to the CPP adds fuel to the eternal debate about the relative benefits of DB pensions and the more market-driven DC (Defined Contribution) plans that are displacing many employer DB plans. While Horner comes down in favor of a DB-like enhanced CPP, he also looks at two alternative proposals built around the DC model, one of them compulsory, the other voluntary. The government’s favored proposal of Pooled Registered Pension Plans (RPPPs) falls somewhere in the middle between the two DC schemes. We’ll look at this more in the coming weeks.
After the blog ran I heard from pension consultant Greg Hurst, president of Vancouver-based Greg Hurst & Associates Ltd. In a lengthy email followed with a telephone interview, Hurst confessed to being “driven crazy” by the many DB myths that come up in any of these debates about DB versus DC pensions.
As you can read in various Hurst-authored articles in Benefits Canada, he has been a vocal opponent of CPP expansion and is in favor of some kind of private-sector DC plan like the PRPP — however, he shares with Big Labour a reluctance to simply turn PRPPs over to Bay Street’s fund companies, banks and insurance companies.
Money In equals Money Out
Hurst began by saying he once learned from a wise actuary the valuable lesson that “money in equals money out.” Seemingly simple, but DB pensions get very complex when they start to factor in the dimensions of time and pooling of risks and rewards.
But both DB and DC pensions are still subject to some simple arithmetic similar to what the wise actuary once stated:
Money In equals contributions plus investment gains.
Money Out equals benefit payments, expense payments and investment losses.
In practice, both DB and DC pensions are usually invested almost identically across diversified portfolios of stocks, bonds and other asset classes. The fact that plan members in DC pensions often are confronted with a myriad of investment choices tends to drive up their costs and poor decisions by unsophisticated members tends to result in lower investment returns than a pooled diversified portfolio might yield.
Pure “no-choice” DC plans can be simpler than DB plans
Hurst says a “no-choice” plan would be a “pure DC” plan, one that is simpler to administer than a DB plan. The result is lower expense payments, which leaves more for benefits.
On the other hand, DB plans do have the advantage of longevity risk pooling, which is normally absent from DC plans unless they offer life annuities at retirement. The two types of plans also have differences in timing of contributions relative to delivery of benefits — what Horner’s study refers to as “risk pooling between age cohorts.”
Generational conflicts and the 3-D Hurricane
Then there are the kind of intergenerational funding conflicts that were touched on in last weekend’s blog on the coming 3-D Hurricane baby boomers are facing in many western nations. [If you've not yet read it you may wish to do so now: that particular blog has generated a large number of web "hits." 3D refers to demographics, debt and deficits] As Hurst puts it, increasing longevity, the demographic “bulge” of boomers moving to the benefits phase and intermittent periods of economic recession all come into play.
The tendency is to raise benefits while holding funding steady, which has resulted in pension crises around the world, particularly in France, Greece and even the UK. The prudent thing should be to build excess funding reserves in anticipation of adverse demographic and economic conditions but few governments and almost no private employer pension plans have done this, Hurst says.
Why reformers are tempted to build on the CPP
A notable exception is the Canada Pension Plan, which was put on a firm foundation in the 1990s. Perhaps that’s why so many current proposals for reform, including Keith Horner’s, try to build on that firm base.
Hurst says Horner’s paper is an “excellent treatise” but says its principal failing is in assessing the risks of the “critical differentiators” noted above.
We’ll close with this direct lift of Hurst’s email to me:
How can the significance of such risks be ignored in the context of riots in Europe and widespread media coverage of the state of public sector pension plans in the U.S. and elsewhere? The current policy direction being followed in Canada is to preserve the stability of our current government programs, and enhance them with stronger, more universal DC arrangements.
The former provides a strong basic level of pension, while the latter can empower individuals to ensure their own retirement income security with far less exposure to the demographic and economic risks that have undermined the security of DB plans worldwide.
I'm not going to argue against the fact that the pension gap between private and public sector workers is growing or that demographic and economic risks have undermined the security of DB plans worldwide, but the critics of enhanced CPP are distorting the facts to suit their political agenda.
The most important fact lost in this debate is that defined benefit plans can work if you get the funding right and when administered properly using world class governance standards, these DB plans outperform DC plans. I think people like Greg Hurst and even Bill Tufts have a lot to lose if CPP expansion takes hold, which is why I take everything they write with a grain of salt.
One huge point of contention I have with the "Greg Hursts" of this world is that they claim a “no-choice pure DC” plan would be a lot simpler to administer than a DB plan, resulting in lower expense payments, which leaves more for benefits. This is pure and utter nonsense. The last time I blasted Jonathan Chevreau on my blog, in another entry on Canada's pension myths, I stated the following:
Last week it was Jonathan Chevreau of the National Post who criticized the Liberals' proposal, dragging "Big CPP" into Canadian politics. I ripped into that analysis, and I'm going to rip into this one too. The National Post should be ashamed of itself for publishing this drivel. I'd love an opportunity to openly debate the likes of Jonathan Chevreau, Neil Mohindra and anyone else who blindly supports the private sector "solution" and openly questions the benefits of Canada's large defined-benefit (DB) plans without basing their analysis on facts. Then again, what else do you expect someone from the Simon Fraser Institute to write? It would be nice if he disclosed how many banks and insurance companies fund this institute.
I'm too tired and cranky to go through all the arguments I went over last week. Do the large DB plans take too much equity risk? Yes, they do, both in public and private equities. Do they invest in alternative assets like hedge funds, real estate and infrastructure? Yes, most of them do invest in all these asset classes (except hedge funds; a few funds don't invest in external hedge funds) and they also have internal alpha strategies to lower their costs. Are these alternative asset classes "riskier" than bonds? Yes, but over a long period, they're typically a lot less risky than stocks and they offer important diversification benefits.
As far as the "administrative costs" of the CPP, they are shared by Human Resources Development Canada and the Canada Revenue Agency, which is good. These agencies are delivering great service at a very low cost. The private sector wouldn't do a better job at administering the CPP.
Finally, as I mentioned in my comment on the "Big CPP," most Canadians are clueless about CPPIB's investment partners, but I assure you that no defined-contribution (DC) plan can invest in Brevan Howard, Bridgewater, Apax, Lone Star, Texas Pacific Group or any of the other top private funds listed on their site. This is an important source of alpha, on top of the internally generated alpha, adding basis points on their policy (benchmark/ beta) portfolio. Over the long-term, all that alpha adds up, which is why CPPIB pays these managers big fees for delivering meaningful alpha.
If Mr. Mohindra and Mr. Chevreau can find me a low cost ETF that delivers a performance remotely resembling that of these top fund managers, then I will listen to their arguments. Till then, I suggest the National Post stops publishing these spurious comments from biased "experts" who spread disinformation and perpetuate myths claiming Canada's large DB plans can't do a better job than the private sector in managing our retirement savings.
They are doing a better job and they should be given increasingly more responsibility to continue delivering low cost pension fund management to as many Canadians as possible who are willing to pay premiums for a secure retirement.
So, while people worry about the "Pension Ponzi," I'm far more worried about "Pension Poverty," which I see growing by leaps and bounds over the next decades. It's high time Canadian policymakers get their collective heads out of their asses, stop reading the right-wing drivel Mr. Chevreau and the National Post publish and start listening to real pension experts like Bernard Dussault, Canada's former Chief Actuary and others who actually know what they're talking about.
If we're going to solve the pension crisis once and for all, we need concessions from all stakeholders, but we also need to leverage off our smartest resources and avoid so-called "experts" who pander dangerous ideas that will only ensure more pension poverty down the road. They are hazardous to the pension health of our great country and I will call them out every single time.
If The U.S. Government Loses Its AAA Rating It Could Potentially Unleash Financial Hell Across The United States
If The U.S. Government Loses Its AAA Rating It Could Potentially Unleash Financial Hell Across The United States
For decades, the U.S. government has had a AAA rating. On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get. Moody's scale actually uses lettering that is a little different from the other two big agencies ("Aaa" instead of "AAA"), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating.
The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out. The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back. In fact, we are rapidly approaching the point when this debt will no longer be serviceable. If the credit rating of the U.S. government is not slashed right now, it will be soon enough. In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago. But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.
As I have written about previously, government debt becomes more painful the higher that interest rates go.
When the big credit agencies downgrade the credit rating of a government, that is a signal to investors that they should ask for higher interest rates on debt issued by that government.
This does not always play out in practice (just look at Japan), but nations such as Greece, Portugal and Ireland sure are going through financial hell right now as they deal with reduced credit ratings and soaring interest rates.
Right now, the U.S. government is able to borrow gigantic quantities of money at ridiculously low interest rates. This is the primary reason why the debt disaster predicted by so many in the past has not arrived yet.
If the credit rating of the U.S. government is downgraded, it could finally get investors all over the world to realize that the game is over and that they should be demanding much higher returns on debt issued by the U.S. government. The truth, as U.S. Representative Ron Paul put it recently, is that the U.S. government is already "insolvent" and at some point we are all going to have to face reality....
"Ultimately, the fundamentals show this country is bankrupt."
So whether or not it happens right now, the truth is that at some point the credit rating of the U.S. government is going to go down and interest rates are going to go up.
Unfortunately, it appears that this might happen sooner rather than later.
Earlier this week, Moody's Investors Service publicly announced that it would be reviewing our Aaa bond rating for a possible downgrade.
On Thursday, S&P actually went so far as to announce that there is a "50 percent chance" that it will downgrade the credit rating of the U.S. government within the next three months.
S&P has been warning of trouble for some time now. Back on April 18th, Standard & Poor’s altered its outlook on U.S. government debt from "stable" to "negative" and warned that a downgrade was likely at some point soon if nothing changed.
If the credit rating of the U.S. government gets slashed and if that results in higher interest costs on the national debt, that is going to make it much harder to balance the budget.
The U.S. government will take in somewhere around 2.2 or 2.3 trillion dollars this year. It will spend somewhere in the neighborhood of 3.5 or 3.6 trillion dollars this year.
Included in that spending is about 400 billion dollars that goes for interest on the national debt.
As I explained in a previous article, if our interest costs double or triple it is going to make it basically impossible to balance the budget under our current system.
If interest rates on U.S. government debt were to rise to moderate levels, we could soon be easily paying a trillion dollars a year just in interest on the national debt.
If interest rates on U.S. government debt were to rise to the levels that Greece, Portugal and Ireland are now facing, it would be beyond catastrophic.
But a reduced credit rating and higher interest rates would not just hurt the finances of the U.S. government.
Any financial institution that is linked to the U.S. government in any way would also probably be downgraded.
This fact was noted in the announcement put out by Moody's this week....
In conjunction with this action, Moody's has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the government or the affected financial institutions.
Just think of the financial carnage that would cause.
Also, check out what one Bloomberg article had to say about the potential cascading effects of a credit rating downgrade for the U.S. government....
At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said. An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.
But the nightmare would not end there. The truth is that the credit ratings of large numbers of state and local governments from coast to coast would likely be reviewed and downgraded as well. Right now, many state and local governments are scratching and clawing in a desperate attempt to survive financially, and a significant rise in interest costs would be enough to wipe many of them out.
The ripple effects of a U.S. government credit downgrade would be endless.
A lot of people argue that if the federal government ran a balanced budget from now on none of this would matter.
Unfortunately, that is not true.
At this point, a very high percentage of U.S. government debt is short-term debt. That means that gigantic amounts of debt must be "rolled over" each year in addition to any new debt that we take on. So even if interest rates rise significantly on just the existing debt that we have it is going to be a total nightmare.
And make no mistake, whether it happens now or later a collapse of U.S. government finances is coming.
David Murrin, the chief investment officer at Emergent Asset Management, recently told CNBC the following....
"It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it"
Right now it is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course. We are on a runaway train that is heading straight for a brick wall.
Europe is also a complete financial wreck. The sovereign debt crisis over in the EU continues to grow worse by the day and there is no end in sight.
If the U.S. collapses, Europe is not strong enough to save it. If Europe collapses, the U.S. is not strong enough to save it.
We really are entering an unprecedented time in world history. We are on the verge of the first truly global financial disaster.
It is going to be interesting to see which major currency crashes and burns first. Some think that it will be the euro. Others think that it will be the dollar.
In any event, the reality is that the current global financial system is not sustainable. The folks that are in charge can try to keep things together for as long as possible, but at some point the dominoes are going to start to fall and the house of cards is going to crash.
We have entered a time when there is going to be financial crisis after financial crisis. Even if the EU and the U.S. government can somehow fix things for the moment, more problems are going to be just around the corner.
The world has become incredibly unstable and the entire globe is going to be shaken. Most people cannot even conceive of the kind of financial hell that is coming our way as a nation.
Yes, it can be a bit sad to think about what is happening, but it is much better to be armed with the truth than to be totally clueless and totally unprepared.
Weekend Fun Part 4: OVERDOSE: The Next Financial Crisis
By Jeff Harding, on July 16th, 2011
OVERDOSE: The Next Financial Crisis
This movie on the causes of the financial crisis was produced in Sweden by Henrik Devell, directed by Martin Borgs, and narrated by Johan Norberg, a Senior Fellow at Cato Institute, and a prominent libertarian and frequent guest on Stossel. It is very professionally done and entertaining. You can see it right here on The Daily Capitalist Theater. Turn your video setting up to 720p. It is a feature length film, 46 minutes, so sit back and enjoy it.
In times of crisis people seek strong leaders and simple solutions. But what if their solutions are identical to the mistakes that caused the very crisis? This is the story of the greatest economic crisis of our age, the one that awaits us.
When the world’s financial bubble blew, the solution was to lower interest rates and pump trillions of dollars into the sick banking system. “The solution is the problem, that’s why we had a problem in the first place”. For Economics Nobel laureate Vernon Smith, the Catch 22 is self-evident. But interest rates have been at rock bottom for years, and governments are running out of fuel to feed the economy. “The governments can save the banks, but who can save the governments?” Forecasts predict all countries’ debt will reach 100% of GDP by next year. Greece and Iceland have already crumbled, who will be next?
The storm that would rock the world, began brewing in the US when congress pushed the idea of home ownership for all, propping up those who couldn’t make the down payments.
The Market even coined a term, NINA loans: “No Income, No Assets, No Problem!” Enter FannieMae and FreddieMac, privately owned, government sponsored. “Want that vacation? Wanna buy some new clothes? Use your house as a piggie bank!” Why earn money to pay for your home when you can make money just living in it? With the government covering all losses, you’d have been a fool not to borrow.
The years of growth had been a continuous party. But when the punchbowl ran dry, instead of letting investors go home to nurse their hangovers as usual, the Federal Reserve just filled it up again with phoney money. For analyst Peter Schiff, the consequence of the spending binge was crystal clear: “we’re in so much trouble now because we got drunk on all that Fed alcohol”. Yet along with other worried experts, he was mocked and derided during the boom.
Have you taken out a mortgage, invested capital or bought shares? If you have, likelihood is you lost out in the latest bust. Governments promised decisive action, the biggest financial stimulus packages in history, gargantuan bailouts: but what crazed logic is this, propping up debt with…more debt? This documentary brings an entirely fresh voice to the hottest topic of today.
THE LORD IS SHAKING THE NATIONS PHYSICALLY, SPIRITUALLY, FINANCIALLY: Why, and how should we respond?
(Jerusalem, Israel) The nations are being shaken – physically, spiritually, emotionally, financially, politically and in so many other ways.
The people of Norway have been shaken this week by seeing sheer evil unleashed against precious, innocent children.
Japan has been shaken this year by the enormous earthquake, the resulting tsunami, and the horrific nuclear meltdown.
The people of Egypt, Syria, Tunisia and Yemen have been shaken this year by dramatic and largely unexpected the revolutions underway there and throughout the Arab world.
Iran has been shaken by the enormous pro-democracy movement that took to the streets but was then nearly crushed by the tyrannical government in Tehran.
The people of Israel are being shaken by fears that Iran is rapidly closing in on building nuclear weapons and the world is not doing nearly enough to stop them in time.
Greece has been shaken by its unprecedented debt crisis and resultant riots and social unrest.
Americans, too, are being shaken. We face arguably the worst economic crisis since the Great Depression. Nearly half of all Americans believe we are heading towards another Great Depression. Unemployment is over 9%. Housing foreclosures are skyhigh. People have lost enormous sums of money due to depressed housing prices and stock market volatility. The federal government is trying to spend our way to prosperity but is making things worse. Our annual federal budget deficit topped $1.3 trillion last year.
This year, it looks like the feds will spend more than $1.5 trillion beyond what they are taking in in revenue. Our debt is skyrocketing. The U.S. is now on the verge of financial default, and hampered further by political ineptitude in Washington that threatens to comp0und an already precarious situation.
What if these events are not all random? What if the God of the Bible is allowing these to happen to shake us, to wake us, to get our attention, that we might turn to Him and ask Him to have mercy on us and help us?
The Lord said through the ancient Hebrew Prophet Haggai that the nations would be shaken in the future.
“For thus says the Lord of hosts, ‘Once more in a little while, I am going to shake the heavens and the earth, the sea also and the dry land. I will shake all the nations….I am going to shake the heavens and the earth. I will overthrow the thrones of kingdoms and destroy the power of the kingdoms of the nations.” (Haggai 2:6, 7, 21, 22)
In the New Testament, the Lord reinforced that theme. “See to it that you do not refuse Him who is speaking. For if those did not escape when they refused him who warned them on earth, much less will we escape who turn away from Him who warns from heaven. And His voice shook the earth then, but now He has promised, saying, ‘Yet once more I will shake not only the earth, but also the heaven’….Therefore, since we receive a kingdom which cannot be shaken, let us show gratitude, by which we may offer to God an acceptable service with reverence and awe; for our God is a consuming fire.” (Hebrews 12:25-29)
Bible prophecy is clear: the Lord shakes individuals and nations that we might let go of all of the flawed political, philosophical, intellectual and religions notions that we cling to that won’t give us true peace, that don’t give us real hope, that can’t bring us any security, that can’t provide forgiveness from our sins much less eternal life for our souls. The God of the Bible wants to shake us loose of such things that we might turn to Him, and to the life He offers through faith in His Son, the Lord Jesus Christ. The Lord isn’t letting us be shaken because He hates us. He’s letting us be shaken precisely because He loves us and wants us to repent and turn to Him and call out to Him, as individuals, as families, and as nations.
Jesus said, “I am the resurrection and the life; he who believes in Me will live even if he dies, and everyone who lives and believes in Me will never die. Do you believe this?” (John 11:25-26)
In an appearance at the Casey Research Spring Summit, Michael Maloney takes a look at the recent contraction of the money supply—it’s not pretty.
“This is an emergency – there’s something going wrong here,” Mike tells the crowd.
The dilemma of the U.S. Federal Reserve is that it’s damned if it does, damned if it doesn’t:
“If they end quantitative easing, it’s going to go into deflation—a huge implosion. If they continue it, the dollar continues losing value, and we go into a crisis of confidence… Any way this turns out, the dollar is going to go into a crisis of confidence. There’s no escaping that; you can’t do what they’ve done to the monetary system over these years, you can’t cheat gold the way they have done, and not have it come back to haunt you someday. “
Mike goes on to look at the money supply, particularly the part of the money supply represented by debt. (Remember, the growth of our global economy depends on continual borrowing.) See the GoldSilver.com knowledge center webinar for the charts Mike talks about.
“The reason the Fed is panicked and inflating the money supply is because of this,” Mike says. “Deflation is [Fed Chair] Ben Bernanke’s worst nightmare, and it’s happening right now.”
The portion of the money supply represented by debt has collapsed by more 12 percent in the past few months. Real estate loans at all commercial banks, collapsing. Total revolving credit, collapsing—by 20%, Mike continues, based on the Fed’s own data.
“From World War II to today, this has never happened before. This hasn’t happened since the onset of the Great Depression. These are alarm bells going off saying that you’d better man the life boats.”
Is the Fed About to Make the Mistake of the Decade?
Just as I expected, when the market failed to rally on the debt ceiling resolution, panic set in. As I have been telling people, the stock market is not dropping because politicians are debating whether or not to spend more money.
They have a long record of raising the debt ceiling whenever it threatened to interfere with their spending spree. So the resolution to the debt ceiling was never in question. We knew from day one that Washington would add another trillion or so to the deficit without any real attempt to cut spending. The market has been in trouble since May because it has been starting to price in the next recession.
The S&P has now breached the March intermediate cycle low. In a mature bull market that is almost always a signal that a new cyclical bear market has begun.
I've been warning investors since late April that this was coming. Many were fooled by the phony manufactured rally at the end of June. I knew at the time that the Fed's pitiful attempt to manufacture a momentum move as QE2 came to an end would fail.
All that being said, the market is now moving into the timing band for a major intermediate cycle bottom. My best guess is that the reversal today will probably trigger a weak bounce up to the 200-day moving average, followed by one more leg down. That should mark a more lasting bottom and trigger a six- to eight-week bear market rally. That rally is going to look very convincing and I'll tell you why in just a second. But just like the rally in June, it is going to fail.
Folks, a recession is unavoidable at this point. The piper is going to have to be paid for printing trillions of dollars and bailing out the financial system. Unfortunately there's no way around that. The question is, will Ben Bernanke make the ultimate blunder and initiate QE3? I'll explain in a second.
Next we need to take a look at the dollar chart. It's not a pretty picture. With the market in free fall the dollar should be rallying violently. If May marked the three year cycle low like I originally thought then the dollar should be rising rapidly by now. The fact that it's not is a very ominous sign.
I'm starting to worry that Bernanke is going to initiate QE3, and that he's going to add a currency crisis on top of the economy sliding back into recession. The combination of both of these at the same time will trigger a collapse much worse than what we went through in 2008.
If the market decides that QE3 is in the cards that would be the trigger for our bear market rally. Unfortunately it would also be the trigger for another spike in commodity prices at the very time that the consumer is least able to withstand them.
What Washington and the Fed don't seem to realize is that the problem isn't the size of the dose; it's that we are using the wrong medicine. We've already spent trillions to save the economy and it failed. Let's pray that the powers that be have enough sense to recognize that more trillions are not going to cure the problem, they are going to exacerbate it.
Unfortunately what no one wants to admit is that there is no cure for our problem. We can't stop it. It can't be "fixed." All we can do is make it worse. We desperately need to face reality and initiate the painful policies that are required to halt the car before it drives off the cliff. Failure to do that will mean that the market will force reality upon us as a major global economic collapse.
Before this is all over and done I fully expect the Keynesian economic model will get tossed into the trash heap where it belongs. If it wasn't for politicians desire to spend more than they can afford Keynesian policies would have been discarded decades ago.
Editor's Note: Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market.
I am compelled by the Holy Spirit to send out an urgent message to all on our mailing list, and to friends and to bishops we have met all over the world.
AN EARTH-SHATTERING CALAMITY IS ABOUT TO HAPPEN. IT IS GOING TO BE SO FRIGHTENING, WE ARE ALL GOING TO TREMBLE - EVEN THE GODLIEST AMONG US.
For ten years I have been warning about a thousand fires coming to New York City. It will engulf the whole megaplex, including areas of New Jersey and Connecticut. Major cities all across America will experience riots and blazing fires—such as we saw in Watts, Los Angeles, years ago.
There will be riots and fires in cities worldwide. There will be looting—including Times Square, New York City. What we are experiencing now is not a recession, not even a depression. We are under God’s wrath. In Psalm 11 it is written,
“If the foundations are destroyed, what can the righteous do?” (v. 3).
God is judging the raging sins of America and the nations. He is destroying the secular foundations.
The prophet Jeremiah pleaded with wicked Israel, “God is fashioning a calamity against you and devising a plan against you. Oh, turn back each of you from your evil way, and reform your ways and deeds. But they will say, It’s hopeless! For we are going to follow our own plans, and each of us will act according to the stubbornness of his evil heart” (Jeremiah 18:11-12).
In Psalm 11:6, David warns, “Upon the wicked he will rain snares (coals of fire)…fire…burning wind…will be the portion of their cup.” Why? David answered, “Because the Lord is righteous” (v. 7). This is a righteous judgment—just as in the judgments of Sodom and in Noah’s generation.
WHAT SHALL THE RIGHTEOUS DO? WHAT ABOUT GOD’S PEOPLE?
First, I give you a practical word I received for my own direction. If possible lay in store a thirty-day supply of non-perishable food, toiletries and other essentials. In major cities, grocery stores are emptied in an hour at the sign of an impending disaster.
As for our spiritual reaction, we have but two options. This is outlined in Psalm 11. We “flee like a bird to a mountain.” Or, as David says, “He fixed his eyes on the Lord on his throne in heaven—his eyes beholding, his eyelids testing the sons of men” (v. 4). “In the Lord I take refuge” (v. 1).
I will say to my soul: No need to run...no need to hide. This is God’s righteous work. I will behold our Lord on his throne, with his eye of tender, loving kindness watching over every step I take—trusting that he will deliver his people even through floods, fires, calamities, tests, trials of all kinds.
Note: I do not know when these things will come to pass, but I know it is not far off. I have unburdened my soul to you. Do with the message as you choose.
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