Drowning In Debt

The United States government is drowning in debt (so is the citizenry but that is whole other mess) and the rating agencies are finally starting to figure it out. S&P cut the US's debt outlook from stable to negative. This is recognition of our worsening federal budget situation and the impending future explosion of costs.

Such a warning may be a precursor to lowering the US's credit rating from it's currently perfect AAA unless we are able to rein in rising costs. The US national debt is expected to approach or exceed 100% of our GDP (annual economic output) by late this year or early  next year by many estimates. At this point the country is technically insolvent from a fundamental stand-point. If the US were to lose it's perfect credit rating the result would likely be a spike in interest rates since most consumer rates are tied to government bond rates which would rise if our credit risk were perceived as increased. For those of you interested click here to view debt ratios and forecasts for most countries. You can also read more about S&P's change in a Wall Street Journal article by clicking here.

The current size of our deficit is truly astounding...recently in the news was the near government shut-down over the budget battle in which one of the major arguing points was whether to cut ~$30 billion in spending or ~$40 billion. Just to put that in perspective our projected deficit is ~$1.5 trillion so our leaders spent weeks arguing over what amounts to 2% of the budget problem on the low end and 2.67% on the high end...anyone see the problem with that?

If you want to get a real-time look at lot of the economic stats check out US Debt Clock.org

The Power of Texas

Ever wonder how a government should act if it wants a thriving private-sector with low unemployment and a better than average budget situation over the long-term? Apparently a lot like the State of Texas. Check out this article if you want to know more. While I don't believe that TX is perfect by any means it does seem to be doing better than most. Why?

In a nutshell:

• Low taxes
• Lower average regulatory burdens
• State that works hard to maintain a balanced budget
• Government that generally leaves the private sector to do what it does best - create jobs and grow!

Mortgages a Bellweather on Property Rights?

Businessweek recently ran an opening article on the recent foreclosure debacle. The center piece of the article was focused on how the mortgage industry has been unable to effectively upgrade title record systems out of paper and into a more modern system. This was one of the major contributors to the foreclosure debacle. Another point the author comments on is how the ability to enforce and rely on property rights is critical to successful, developed, capitalistic systems.

I think the author is completely right in arguing that the current mess in mortgage re-sale and packaging has weakened the sanctity of property rights. These things changed hands so often and were so poorly documented that in some cases no one can figure out who ultimately owns what and even if they can they don't have documents proving that ownership that are acceptable to the courts.

Our government has taken steps into the private system that have only served to cloud the issue of property rights. They have weakened our rights to own and benefit from the use of property in the form of regulation, taxation, and bailouts. While some of these actions can arguably be justified (more or less) by the extraordinary circumstances of the recent financial crisis - the question we need to be asking ourselves is have we undermined the very system that made our nation great?

Strong and clear property rights, along with the courts' respect for contracts, are probably the two single most important facets of our economy and legal system and they have allowed us to grow as we have. We shouldn't be messing with them unless we have very carefully thought through the consequences...which I don't believe we have done.

Economy Set To Grow in Q4?

Most economists are currently worried about deflation and are expecting tepid economic growth through the rest of this year and into next year. I just found this article, M2 Velocity Suggests A Stronger Q4 GDP, which uses the M2 measure of money supply to comment on Q4 2010 economic growth. Using this measure the author predicts somewhat higher economic growth than the current consensus among economists. The logic behind the argument is quite sound and it's an interesting approach to analyzing near-term growth forecasts. I think we are still more likely to see growth closer to the consensus, because I believe consumers and business will likely continue hoarding cash (increases in the demand for money) until after the elections end and we see what the new make up of Congress will mean for policy.

Mankiw on Taxes

Dr. Gregory Mankiw recently wrote an article that ran in the New York Times. In the article he describes how taxes impact the decisions of high-income earners regarding how much work to perform. It's a simple and quick explanation, but dead on.

Can Cutting Taxes Raise Tax Revenue?

Yes! - and if you want to know more click here. This is one of the better explanations for how cutting taxes can increase tax revenues, and lower deficits if we don't increase spending at the same time, I have seen in a while. If you are inclined to check up on it the economic principle at work here is the simple observation that people can think about logical consequences. The logic goes like this if I work very hard at running my own business and take some risks I might get rewarded with $1 million in personal income, but if I know that tax rates are increasing so I get to keep less of my $1 million then I don't have the incentive to invest the money needed to earn that million because I need to protect myself from higher taxes so I work less and put money into non-productive and non-taxable investments. The result is I earn less so the tax I pay declines in dollar terms even though the percentage is higher...multiply this effect across the economy at large (and corporations not just individuals do this too) and you get a decline in the economic activity supporting the tax base and the tax base shrinks, which means that despite higher tax rates - a higher percentage collected on a lower base still yields a lower tax revenue number!

No Such Things as Secrets...

At least not if you are in the financial industry. The new financial reform bill that passed includes a new research office that is part of the Treasury. It is authorized to compel financial companies of all sorts to turn over data so it can look for "systemic risks." Data that was previously confidential such as counter-parties to credit default swaps and information on individual loans - such as interest rates. This is information that these companies place a high value on keeping confidential - in fact in come cases the value of a credit default swap may only exist if the purchaser is kept confidential.

The research office is required to keep confidential information protected, but it is also required to make it's data available for public use and is subject to the "Freedom of Information Act." One of the major bedrock principles of our economy is the ability of companies or individuals to create knowledge and information that gives them a competitive advantage and the ability to protect that information. This is an assault on the very basics of a knowledge based economic system.

Obama Calls for Infrastructure Spending

Obama is planning on calling for a multi-year effort to rebuild America's transportation infrastructure as part of series of proposals to breathe life into the economy. The administration plans for the spending, $50 billion initially, to be deficit neutral by closing tax loop-holes. It seems unlikely that spending money and then taking an equivalent amount from targeted industries will be net positive to the economy. I don't know where Obama learned math.

A Window into China's Currency Reserves

The make-up of China's foreign currency reserves has long been speculated at but recent information suggests they are overwhelmingly comprised of dollars.

Obama Takes on Mortgages

The Obama administration is going to take another wack at mortgage modification. Since the previous program had so many rules and restrictions it basically did nothing to aid the housing market or underwater home owners and was a waste of taxpayers' dollars. This time they are going after people that are not yet behind on payments, but are underwater. In order to entice banks to take the necessary hair cut the administration plans for the FHA to take ownership of the newly reduced mortgages.  This will shift the risk of default to the taxpayers! Hopefully the upcoming elections will change the tune out of Washington.

Jobless Rate Hits 9.6%

The August unemployment rate is up to 9.6% from 9.5% which has many people questioning the policies the Obama administration has put in place. The administration has pursued a policy of massive spending, coupled with small targeted tax breaks, and large new social programs and regulation as its general economic strategy.

This is exactly what the economy doesn't need! All the new social programs and regulation just stifle business by forcing business-owners to try to comprehend all the new costs and hurdles they have to deal with it.

Generally, spending has some stimulative effect, but the level of debt the US has incurred is dangerous to our future and so the stimulative effects of spending may be partly or entirely off-set by declines in private spending and investment caused by fear/uncertainty.

Tax reductions would probably help, but without cuts in spending they only worsen the debt problem of our government. Also - what our economy really needs is massive tax overhaul not just minor cuts/deductions.

Debt Clock

This is scary!

Texas Economy Holds Up Well

The national economy seems to be slowing again. Fears of a double-dip recession are growing - but the economy in Texas seems to be holding up a little better. The question for Texas is how long can its economy hold up if the national economy continues to soften. So far Texas has been a relatively bright spot in the national economic picture, but for how much longer.

Economic Downturn Reduces Birth Rates?

The birth rate in the U.S. has been declining for sometime, but apparently is down a little sharper over the last year or so. Some think that economic conditions might be making people decide not to have children or to delay having them. There are many other factors that affect birth rate, but perhaps this deep recession we are in is having an unusually strong impact.

China and Others Stop Buying Treasuries

The Wall Street Journal recently reported that China and other central banks have all but stopped their purchases of treasuries. While this is likely not a long- or medium- term change because China is so intertwined with the U.S. that it would suffer great economic pain if it tried to cut itself off from treasuries. It is a reminder that our current level of borrowing is unsustainable and if other countries really lost faith in our creditworthiness we would be in dire trouble.

The Dismal Jobs Picture

Unemployment has been one of the major problems with the current economic malaise. The government projected that the unemployment rate would hit 8% if we didn't do stimulus - so we did stimulus and the unemployment rate peaked at ~10% and now has settled down around 9.5%. The breadth and depth of job losses are hard to comprehend, but a picture is worth a thousand words:

The chart below shows the depth and length of job losses (in percentages) over the last half century. You can see the original at: http://calculatedriskimages.blogspot.com/2010/08/employment-recessions-aligned-at-bottom.html.

That is one scary picture!

Don't worry it gets worse. Obama's economic policies should have been generating 292,000 new jobs a month beginning in Feb. 2010 in order for the nation to hit a 5% unemployment rate by 2015! We are not even close to this level of job growth...in fact almost all the recent job growth was temporary Census workers. It seems very unlikely that the unemployment rate is going down anytime soon.

Recovery Stalled?

Has the recovery stalled out? The changes in the jobs market may indicate it has...the unemployment rate has held steady at 9.5%, but mostly because of a quirk of how the government calculates the number. As people stop looking for jobs they drop out of the calculation. The private sector simply isn't generating enough jobs to sustain the recovery. Perhaps the reason for the slow jobs growth is the increased use of technology to replace workers.

Balance the Budget - DIY

Think you know what it takes to get the federal budget in line? Then give it a try and see how you do...I managed to get debt to GDP down to 60% by 2023 - a little later than the goal of hard-core fiscal conservatives. If you try it leave a comment with how you did so others can see.

Tax Insanity

Forest Laboratories is going to great lengths to avoid paying US income taxes - legally. I suspect that many people that read this article will be out-raged at the lengths this company is going to and the cost of the lost taxes on the federal budget. My takeaway is somewhat different. The fact that a company would incur such complexity and cost to avoid taxes (and the fact that the tax code is complex enough to allow these loopholes) tells me we are over taxing business. Just think of all the creative energy and money that we could save by lowering taxes and reducing the complexity of the tax code...business could increase investment, cut prices, improve efficiency, and/or hire more workers. All of which are better for the economy and the federal budget in the long-term than simply collecting that money in the form of taxes....think about it.

FOXNews.com - Senate Passes Financial Overhaul Bill

FOXNews.com - Senate Passes Financial Overhaul Bill

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