Posts Tagged ‘social expenditure’

Debt ceiling (re-post)

January 17, 2011

A re-post from just over a year ago and here we are today at a very similar juncture. Today the USA are non only rolling over all previous debt but are also considering raising the ceiling once again whilst Europe is going to roll over and seek somewhere in the neighborhood of E1Trillion (1 trillion Euro). So, in the spirit of our floating exchange rate sovereign currencies, only in terms of roll over and new debt, Western economies are looking to use their pension, insurance and sundry institutional funds to absorb some $2 Trillion.

Now remember, this is only what must be absorbed by all global sovereigns so as to keep our current monetary system alive. By way of comparison, this sum does not take into account any spending on, for example, pensions, health, road maintenance nor, indeed, the military or any new bail out fund that must be set up shortly. Just debt.

Begin re-post from November 2009 – and, by the way, the Fed has confirmed it is the single largest buyer of its own debt issuance… well on its way to become the single and only buyer…

This is going to be interesting.

If you read this essay and this essay, you will know I contend that we have reached the limit of how far we can expand inflation and that as a consequence, our Dollar based fiat monetary system is now broken. The most immediate concern is that deflationary environments bring about the insolvency of government.

Some of you will retort that governments have always been bankrupt but that somehow we’ve always come out ok.

What you are missing is the logic of inflation in a fiat monetary system characterized by floating exchange rate.

For as long as a government is able to borrow progressively more money, then its unfunded liabilities can be kicked down the road. Think of the pension trust fund. The money has been paid in all right. But government has used that money. Physically the money is no longer there; it has been spent. What governments count upon is inflation. Essentially, government feels free to spend today what it thinks it can repay back tomorrow in devalued currency. That in a nutshell, is what Western governments have been doing.

The above works for as long as inflation can be maintained on a positive trajectory and for as long as sovereign participants to the monetary system can and want to purchase each other’s sovereign debt (that is the meaning of floating exchange rates – i.e. the value of a currency is predicated on a basked of other currencies thus relying on sovereigns buying each other’s sovereign debt)

But pushing inflation into a system artificially, aggressively, pervasively and relentlessly over decades necessarily results in distortions, aberrations and criminal behavior. Thus, towards the end of the inflationary cycle, nominal profits progressively show up in fewer and fewer sectors until at the very end they show up only in the financial sector as the entity that is first in line for the use of fiat money.

The point at which nominal profits disappear from most sectors, is the point at which unemployment and social costs soar and is also the point at which tax revenue declines. This is the typical environment in which the power elites are also shown to be willing and consenting participants in unlawful and criminal enterprise.

Here is the problem.

As tax revenue declines, the ability of sovereigns to expand debt is hampered. On one hand declining tax revenue puts a dent in the budget that leads to credit worthiness revisions. On the other hand, as governments apply more of the tactics they think have enabled them to induce inflation into the system till recently (i.e. more spending on public projects, bailouts, military) they worsen an already critical fiscal situation.

This is the point at which sovereigns are either unwilling and/or unable to purchase each other’s debt.

The USA today have opted to increase the debt ceiling by $1.8Trillion.

Even assuming other sovereigns were willing and able to buy US debt, 1.8Trillion is a gargantuan chunk that would be tough to palm off during good times let alone during a crisis when all sovereigns are busy bailing out their own industries and banks.

Considering that the Fed has already been the purchaser of last and only resort of US debt in the past 8 months, it will be interesting to see who will buy any of this 1.8Trillion and how much of it. If the Fed should once again be the largest buyer as it has been in the recent past, the balance sheet of the entity responsible for the global reserve currency (the Fed) is going to show that the international monetary system is totally and utterly broken.

http://www.reuters.com/article/idUSTRE5B849020091210

The stuff revolutions are made of (re-post)

December 5, 2010

I am still on the road. But this post from early 2009 is as topical as ever.

 

The stuff revolutions are made of

By guidoamm

I think it is by now a foregone conclusion that before the end of this year, regardless of what official statistics may show, most countries in the West will have to contend with unemployment in excess of 15% in real terms. It can be argued that at least the USA is already approaching that level and Spain, Greece and Italy aren’t far behind if not alrady at that level too. That in itself is cause for serious concern for governments. As unemployment grows and, necessarily, as the credit market collapses, inflation and demand collapse too engendering lower earnings and therefore lower tax revenue for municipalities, states and the government. As unemployment grows and the ability of governments to raise finance is diminished (rating agencies lowering credit worthyness of sovereign debt), government will have to redirect resources towards maintaining those promises and services the absence of which would more readily indicate that not all is well with the state: i.e. pension payments and any monetary disbursments perceived directly by the public. This of course will drain resources from departments such as the postal service, road works, civil administration, education, forestry services, fire fighting, international aid and so forth. Naturally, this will not be an event but a process whereby services will be gradually curtailed in order to conserve liquidity and pay those direct disbursements to the public. At some point though, something may happen to trigger the anger of the masses. It could be the death of a child because an ambulance did not show up in time or the death of a bunch of passengers on a bus or train due to absence of safety infrastructure or its state of disrepair. The trigger is not what matters; anything will do. What matters is that when unemployment is high, savings are low and prospects hazy, the masses get twitchy and can go on a rampage for any number of reasons. Politicians and administration officials don’t need me to tell them that even in a recession, let alone a depression, maintaining social harmony is a tall order particularly when the shenanigans of the power elite come to light as they inevitably do – that’s because as the tide goes out, you get to see who was swimming naked (think Madoff but count on many more to come out down the road). So, before we get to that stage which, in the current environment, could be as soon as the end of this year, governments will have to do something to shift the attention of the masses and keep them focused on something, or someone, that will be made out to be a threat to their well being. Therefore, unless some very bright government minion comes up with a brilliant solution to kick inflation up the ass and send it soaring again soon, that will be all she wrote folks. War will be upon us sooner than you can imagine.

Count down to global war

November 25, 2010

http://www.telegraph.co.uk/news/uknews/law-and-order/8159544/Police-chief-warns-of-new-era-of-violent-protests.html

Sir Paul Stephenson said his officers had failed to predict the change in mood among demonstrators before the Millbank riot two weeks ago.

Britain’s most senior police officer said the violence, which saw anarchists and students run amok through buildings housing the Conservative Party headquarters illustrated that “the game has changed”.

This is exactly what will lead us into a global war.

As monetary policy has lost traction, social expenditure is being cut right at the time that social costs are rising. Across the West, students, pensioners, the unemployed, the marginally employed and, eventually, even the employed will not be happy with their situation and with the outlook life is presenting them with.

Demonstrations will become gradually more intense and large. Soon, as mobs will be looking for politicians and bankers to lynch, our virtuous leaders will plunge us into a world war.The reason is simple. The West cannot contemplate a revolution in the purportedly civilized and industrialized world. So that when sufficient numbers of people will be angry, hungry and homeless and, simultaneously, the elite will be caught-up in scandal after scandal, revolution is sure to follow.

At that point. We’ll have us a war on our hands.

No joy in confirmation (re-post)

November 12, 2010

No joy in confirmation…

By guidoamm

Greece, Spain, Latvia, California, the UK, Italy… it could be anyone.  It really does not matter. What matters is that this is the clearest indication yet that our monetary system has hit a brick wall; a mathematical brick wall that is enshrined in a monetary logic predicated on accelerating credit and money creation at rates that far exceed the rate of growth of the economy.

The rationale for the use of an unchecked fiat monetary system is well established. Fine. Now we have to deal with the political and social consequences of said system. Namely, when the monetary system hits the wall as it did in the 30s and again in the late 60s and again today, the result is always the same i.e. excess debt, gross industrial overcapacity thus rising unemployment, declining purchasing power,  implosion of asset values with the direct result of a collapse of state tax revenues.

Under these circumstances, rolling over debt becomes increasingly difficult till the moment it becomes impossible. Try this for size. Just in the current year 2010 the USA will have to roll over something in the region of US$450Billion. That’s just the USA.

If you cannot spot the problem, here it is. In a US$ based fiat monetary system predicated on floating exchange rates as we have today globally, sovereign currencies derive their value from the value of other currencies. Hence, sovereign currencies derive their value from other sovereigns buying each other’s sovereign debt.

$450Billion is pretty much a whole chunk of the entire global sovereign ability to buy debt. This means that in order to succeed, the US government must attract virtually the entirety of budgets of most sovereigns thus leaving no funds available for countries to buy any other country’s debt…. ergo… the floating exchange rate mechanism as contemplated by our current monetary system is broken…. kaput; dead; it is no more; it is pushing up daisies;

Where do we go from here?

If our politicians were a sober well meaning bunch, I’d say we have nothing to worry about. A bit of austerity for a few years and we’ll be on our way again.

But politicians being what they are and operating in a legal and political environment that is geared towards ensuring expediency over efficiency or intrinsic value, I say a world war is a lock-in.

The problem starts with the inability of government to finance its requirements via tax revenue.  Thus government increasingly relies on the capital markets. As even the capital markets begin to show the strain, governments must curtail public spending.

http://cbs13.com/local/tracy.911.calls.2.1502690.html

Curtailing public spending brings you this:

http://news.sky.com/skynews/Home/World-News/Greece-Mass-Strike-Over-Tough-Economic-Measures-Sees-Country-Grind-To-A-Halt/Article/201002415558481?lpos=World_News_Second_Home_Page_Feature_Teaser_Region_0&lid=ARTICLE_15558481_Greece%3A_Mass_Strike_Over_Tough_Economic_Measures_Sees_Country_Grind_To_A_Halt_

http://www.businessweek.com/globalbiz/content/feb2010/gb20100224_114271.htm

http://www.independent.co.uk/news/world/europe/europes-winter-of-discontent-1908527.html

As you curtail public spending and as public anger rises, and as the shenanigans of the power elite keep coming to light(http://www.mcclatchydc.com/2010/02/24/88119/as-insurer-hiked-rates-39-executives.html

the public is sure to turn violent.

As the public turns violent, governments take the brunt of the violence and political control may be lost and anarchy and/or revolution ensue.

That’s the point at which governments must have done their homework well in advance and prepared a bogeyman somewhere off their shores so as to be able to, the moment come, turn the attention of the masses away from their own failings and the failings or our entire economic/social/political models.

Food stamps usage: where is the recovery?

October 6, 2010

http://www.zerohedge.com/article/foodstamp-usage-climbs-new-all-time-record-highs

July foodstamp has just climbed to a new all time high. […] Participation has set records for 20 straight months.

Curtailing social expenditure…

August 18, 2010

I won’t bore you with more links to past posts. If you are interested in perusing some of numerous previous posts by the same title which should be read along all the posts titled “tic, toc…” you can to a search on this blog.

Countdown to war is still on… but I have a feeling it is accelerating…

Far from me to give any credence to or have respect for their operating model but I happen to agree with Moody’s take on the state of our sovereigns:

http://www.telegraph.co.uk/finance/economics/7950775/Time-is-running-out-for-the-West.html

Some excerpts (but it is worth reading the entirety of this short article) –

Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has ‘fast-forwarded’ history, eroding all the time available to adjust, ” said the group’s quarterly Sovereign Monitor.

Guido here: That’s right! Because inflation is inherently an accelerating dynamic. Hence the reason that since 1980 sovereign debt in the USA has progressed by 1200% but GDP only progressed by 100% in the same time period.

Countries that “fail to demonstrate the level of social cohesion required to stabilise debt” will lose their AAA rating. “Intra-generational” conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards. ”

Guido here: In plain English, the above means that social expenditure must be curtailed and that doing so will inevitably generate social unrest that must be managed (i.e. Greece).

This time the threat lies ahead as the aging crisis drives up pension and health costs on a static tax base. “While the current stock of debt is large, it is dwarfed by the accumulation of future liabilities if policies do not change.”

Guido here: As above. Social expenditure must be curtailed.

All the above results necessarily in things like this (of which you will find dozens of examples in previous posts):

http://www.telegraph.co.uk/news/newstopics/politics/7951203/Winter-fuel-payment-cuts-to-hit-millions-of-pensioners.html

The basic winter fuel payment, made to more than 12 million people, will also be cut by £50 for new recipients and £100 for the oldest.

Reality vs academic research… sometimes they match

August 14, 2010

Eric Sprott digging out scientific papers that show the inherent diminishing return of debt i.e. showing the mathematical limit of excessive spending.

With thanks to Zero Hedge.

http://www.zerohedge.com/article/eric-sprott-we-are-now-paying-funeral-keynesian-theory

Excerpt:

If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the “Keynesian endpoint”, where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???

End excerpt –

Eggspurt (expert) research is of course always welcome but the ability to notice empirical evidence can save you a whole bunch of time and headache. Deficit spending has an inherent diminishing-return quality about it. How else could you explain that since 1980 government debt has progressed from US$2Trillion to US$12Trillion and yet GDP only progressed from US$6Trillion to US$14Trillion? This is simple arithmetic that even modest merchants use to judge the viability of their shops. But above all, for anyone that wants to see it, this is an economy that has been aggressively stimulated for many, many years and yet the main stream political/economic elite is calling for more stimulus (much more if your name is Krugman, somewhere in the realm of blue-yonder more). Recall here the definition of insanity.

https://guidoromero.wordpress.com/2009/11/07/the-utility-of-a-fiat-monetary-system/

As I outline in the post below, other than a lag in time there is no difference between government and private debt. Eventually both the interest and principle must be paid through taxes. Pay today or pay tomorrow but pay we must because government has no money of its own. Government’s only income comes from you and me. So that in a situation where both government and individuals are taking on increasing amounts of debt, you must perforce reach a mathematical limit beyond which underlying economic activity no longer suffices to service the debt (notice in this regard the various nations, states and municipalities that are circling the fiscal drain as we speak). At this point, taking on further debt in an attempt to stimulate economic expansion is sheer madness.

https://guidoromero.wordpress.com/2009/04/27/for-petes-sake-there-is-no-difference-between-household-and-government-debt/

But of course. Though mad it might be, deficit spending is populist and politically expedient. So deficit it is for as long as we can maintain some degree of social expenditure. But gradually as the social promises our leaders handed out over the past half century must necessarily be curtailed, social unrest will follow till revolution enters the realm of the probable. At that point our “leaders” will plunge us in a world war.

Curtailing public spending a precursor to war…

July 30, 2010

Today Greece, tomorrow a nation near you.

As governments tax revenue dwindles and as their ability to borrow is progressively hindered by a slowing economy and rising unemployment, the social promises of the past thirty years cannot be met.

As a result public anger will rise and though initially it may be viewed as a localised phenomenon, eventually as more countries succumb to the same dynamic, social unrest will spread across borders and will ortanize too.

If tax revenue continues to collapse, revolution becomes a distinct possibility.

But it would be most unbecoming to allow revolution to happen anywhere in the West. Revolution is something that happens to banan republics but certainly not in the “civilised” West that purports to be a beacon of morality.

But when simple arithmetics tells you that Greece is only the prologue of what is to come, then what do you do?

Typically, at this juncture with nowhere to turn in order to increase tax revenues, the West engineers large scale conflicts.

http://www.guardian.co.uk/world/2010/jul/29/greek-police-tear-gas-striking-truckers?CMP=twt_gu

Government issues emergency order as fuel shortages strand tourists and disrupt food and medical supplies… […] But hopes of a return to normal were quickly dashed when riot police fired tear gas at thousands of truckers gathered outside the transport ministry this morning.

On the brink of a new age of rage

May 22, 2010

Not my words. This is the Financial Times that says so.

http://www.ft.com/cms/s/0/4526d52c-6506-11df-b648-00144feab49a.html

Excerpt:

Far be it for me to make a dicey situation dicier but you can’t smell the sulphur in the air right now and not think we might be on the threshold of an age of rage.

Good to know I’m not the only crank out there.

Curtailing public services as precursor to war… the sequel continues… (Los Angeles)

April 10, 2010

http://www.bloomberg.com/apps/news?pid=20601110&sid=az.UIyizQj7I

Excerpt:

April 6 (Bloomberg) — Los Angeles Mayor Antonio Villaraigosa called for shutting down “nonessential” city services two days a week, after Controller Wendy Greuel said the municipality’s cash may run out next month. The plan would target services that don’t generate revenue, …”

Shutting down non essential servicers; ok. However, what they should be really doing is shutting down those services that even though generate revenue, cost more than revenue. Those are the services that are killing the budget.

Anyway, along with Walmart slashing prices on consumer goods:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTwYV9yABurU

… the inescapable conclusion is that state tax revenue is reduced further still. So individual states are going to need to cut a lot more services.

Add to that the fact that property taxes constitute a significant chunk of state tax revenues. But property tax rates are assessed only every 3 years or so. Now, considering that since the peak in 2007 on average real estate values have dropped at least 30% across the US, this is one more shoe that is about to drop with regards to state tax revenues and, in turn, for federal tax revenue.

Tic, toc… tic, toc… tic, toc…