               |
WE'RE DOOMED By Mike Gasior I would be remiss if I just ignored the obvious fact that this edition of the newsletter is entitled "February" yet you are clearly receiving it in May. With some degree of pride I will mention that I am currently in the middle of the most hectic and successful year that I have enjoyed since beginning this company 18 years ago. With an equal component of regret I admit that this schedule has made it nearly impossible to sleep enough, eat correctly or play the amount of golf I had promised myself as part of a New Year's resolution. Part and parcel of that has been my delinquency with regard to getting my newsletters and videos out in a timely way, but I am still determined to get caught up, so please be prepared for perhaps a few weekly Mike Gasior Newsletters until I am back on track. I will assure you that the dearth of issues from me in the previous few months was not at all due to a shortage of things for me to talk about. As I type this to you I have a pile stacked in front of me nearly 8 inches deep of articles and information that I put aside on a nearly daily basis containing stories, facts and issues that catch my attention and I think others (you) might find interesting. To be quite honest, I think that you'll find the next few editions I write to contain a variety of topics that you will find informative and perhaps fascinating, but I'll leave that decision to you. Also, I can't ignore my somewhat alarming title for this month's edition, but you will quickly see my rationale for the choice. All I can tell you is that politicians and the future health of society and the economy are at the crux of the story, which anyone can only assume must end in some sort of catastrophe. After watching the U.S. politicians who are currently the ones in a central position to decide the future of our country in action just a couple of months ago, both my jaw and heart sank after witnessing the collective array of these windbags and idiots. It was quite sad to accept that this crew is who will determine the very near fiscal future for so many Americans, and I can tell you in summary that I was mortified at what I saw. I knew right then that we are without any doubt on the path of ruin, and that we are in fact doomed. I will explain and illustrate this in detail for you in a second. THE REMAINING 2007 SEMINAR SCHEDULE I'd like to take a moment to remind you that I will still be presenting a wide array of programs throughout the rest of this year in New York, Bermuda and Grand Cayman. There will be a total of 14 of our most popular seminars held in New York, Bermuda and Grand Cayman. No matter your interest or position, I am certain you will find one that will further your understanding of some segment of the financial marketplace. Rather than list all of them here, please visit the following link to see the entire schedule on one page: http://www.afs-seminars.com/schedule.html Also, although available dates are in very short supply, if your organization would like to hold an in-house training session for your staff, my office will be happy to work with you to schedule any of our standard programs, or help you assemble a custom one that perfectly suits your audience's needs (at no additional cost). Please call my offices at (860)347-6568 and they will answer any questions you may have about holding a session. Finally, although my dance card is basically full for 2007, if your group or organization would like me to speak at a function on the issues of the economy or financial markets, my office can also address those inquiries. Feel free to call me directly to discuss this. Now on with the show WE'RE DOOMED The date was February 28th, 2007, and the time was 1:51 p.m. The location was a hearing room within the U.S. Capital Building. Assembled within the hearing room were the members of the House Budget Committee and the Chairman of the Federal Reserve, Benjamin Bernanke. They had convened for a hearing on the "Long-Term Economic Outlook". In an unusual turn of events, I wasn't traveling that day and was ensconced in my soundproof home office in the basement working furiously on several computers. I needed to reply to the various clients who had written me recently with inquiries and was trying to prepare for the seminar I would be presenting for a client the following day. Like most Wall Street types, CNBC is always displayed on the television in my office (on mute of course) just in case there is any breaking news that a guy like myself is supposed to know about. Out of the corner of my eye I see the beginnings of the previously mentioned hearing beginning. I decide that I deserve a short break and actually grab an adult beverage out of my fridge and settle in to observe and enjoy what the Fed Chair is about to testify on. It would not take long for my enjoyment to turn to literal horror. Understand a few things before I just let the seed fly hear. Number one, I think Ben Bernanke was among the absolute best replacements for an icon like Alan Greenspan and the world's financial markets and economies have reinforced that opinion with the seamless transition that has occurred with the passing of the mantle from one to the other. He is simply a brilliant man and the world, not just the U.S., is lucky to have him with his hand on the tiller steering the somewhat large boat, which is the U.S. economy. Number two, one would expect that the members of such an influential committee within the United States Congress would be those representatives with a deep understanding of how the economy operates, and the government's role within that economy. Especially since they would likely be the group who will guiding and shaping the economic policies that will impact Americans and others for the foreseeable future. And while this might be one's expectation, please let me assure you that after witnessing the proceedings of February 28th, I will personally assure you that this group is by no means the "best and brightest" that the U.S. Congress has to offer; and it was obvious to me that many, many members of the committee had little or no understanding of economics, finance or even the role and operation of the United States Government in general. I will illustrate and point out to you in detail what I witnessed from the 69 pages of transcript I managed to procure that will allow me to precisely illustrate their level of ignorance and/or stupidity. The transcript may not illustrate, however, the exact level of pompousness, grandstanding and the other usual array of politician-style behaviors. For that, you have my apologies. Should you run into me in person sometime, please feel free to ask me to do my impersonations of them, since they are quite funny if I do say so myself. For fear of people accusing me of twisting the words of either Chairman Bernanke or the members of the committee to fit any agenda of my own, I think the best approach is to cut and paste their comments verbatim, which I will. For comic effect, I will then add my observations and comments within parentheses for the purpose of exposing the underlying motive of the respective politician. Let me begin with portions of Chairman Bernanke's opening statement where he presents an amazing array of statistics as well as his concerns about the growing menace that entitlement programs like Social Security and Medicare present to the economy. It may same like a lot of reading, but I have only included the portions of his testimony that are laden heavily with facts and statistics. Much can be learned from digesting his words. CHAIRMAN BERNANKE: The on-budget deficit, which differs from the unified budget deficit primarily in excluding receipts and payments of the Social Security system, was $434 billion, or 3.3 percent of GDP, in fiscal 2006. As of the end of fiscal 2006, federal government debt held by the public, which includes holdings by the Federal Reserve but excludes those by the Social Security and other trust funds, amounted to 37 percent of one year's GDP. Official projections suggest that the unified budget
deficit may stabilize or moderate further over the next few years.
Unfortunately, we are experiencing what seems likely to be the calm
before the storm. In particular, spending on entitlement programs
will begin to climb quickly during the next decade. In the medium-term projections released by the CBO in January, these outlays increase to 10.75 percent of GDP by 2017, an increase of about 2 percentage points of GDP in a little more than a decade. And they will likely continue to rise sharply relative to GDP in the years after that. As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years. Currently, people 65 years and older make up about 12 percent of the U.S. population, and there are about five people between the ages of 20 and 64 for each person 65 and older. According to the intermediate projections of the Social Security trustees, in 2030 Americans 65 and older will constitute about 19 percent of the U.S. population, and the ratio of those between the ages of 20 and 64 to those 65 and older will have fallen to about three. Under these assumptions, the CBO calculates that by 2030, the federal budget deficit will approach 9 percent of GDP; more than four times greater as a share of GDP than the deficit in fiscal year 2006. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37 percent to roughly 100 percent in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100 percent was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. To some extent, strong economic growth can help to mitigate budgetary pressures. And all else being equal, fiscal policies that are supportive of growth would be beneficial. Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems. Economic growth leads to higher wages and profits and thus increases in tax receipts, but higher wages also imply increased Social Security benefits, as those benefits are tied to wages. Higher incomes also tend to increase the demand for medical services so that, indirectly, higher incomes may also increase federal health expenditures. Increased rates of immigration could raise growth by raising the growth rate of the labor force. However, economists who have looked at the issue have found that even a doubling in the rate of immigration into the United States, from about 1 million to 2 million immigrants per year, would not significantly reduce the federal government's fiscal imbalance. An important element in ensuring that we leave behind a stronger economy than we inherited, as did virtually all previous generations in this country, will be to move, over time, toward fiscal policies that are sustainable, efficient and equitable across generations. Policies that promote private as well as public
saving would also help us to leave a more productive economy to
our children and grandchildren. In the end, the fundamental decision that the Congress, the administration, and the American people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare and Medicaid. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. Thus, members of the Congress who put special emphasis on keeping tax rates low must accept that low tax rates can be sustained only if outlays, including those on entitlements, are kept low as well. Likewise, members who favor a more expansive role of the government, including relatively more generous benefits payments, must recognize the burden imposed by the additional taxes needed to pay for the higher spending, a burden that includes not only the resources transferred from the private sector but also any adverse economic incentives associated with higher tax rates (Everything Bernanke had to say is straightforward and supported by facts and everything is already well known to regular readers of my newsletter. I feel no need or compulsion to add to it. Now let's bring in the members of the committee.) SCOTT GARRETT - REPUBLICAN FROM NEW JERSEY: Thank you. Thank you, Mr. Chairman, and Mr. Chairman. Your testimony today is much like testimony of other experts that we have had before this committee in the last month and a half, and that is it's all ominous and discouraging; but I'm sure well-intended, though. Ominous in the sense of the problem that lays before us, and that is not just a short term, but is a long-term one. But basic economic thought would be -- correct me if I'm wrong -- that if we raise taxes on one sector, for example, the business sector, at the end of the day, businesses don't, in essence, pay taxes, it's the consumer who ends up buying that product that ends up actually paying that tax, whether it's a rich consumer, a poor consumer. Is that a correct basic economic thought of how taxes get flowed down to the bottom line? (Get used to a theme here, where the Republican members will constantly chafe at Bernanke's suggestion that perhaps higher taxes will be necessary to pay for all of these entitlement programs. You will see other suggestions like this one, that increasing taxes on corporations [or anyone for that matter] is ultimately a tax on both rich and poor. This was a perfectly wonderful argument that I agreed with when the Republicans were a low tax and small government party. But it's a totally vapid position to take for this current crop of GOP representatives who enjoy cutting taxes, but have never seen a spending program they didn't like. You should also get accustomed to the patient responses of Bernanke to these assorted windbags.) BERNANKE: Businesses aren't people. They are -- corporations are fictional people but not real people. And somebody, be it the shareholders, the customers, the workers, or somebody, is going to bear the ultimate burden, the ultimate incidence of taxes on businesses. MARCY KAPTUR - DEMOCRAT FROM OHIO: Thank you, Mr. Chairman, very much. Welcome, Chairman Dr. Bernanke. Glad to have you here. BERNANKE: Thank you. (The comments and questions from this congresswoman are by FAR the most troubling and worrisome to me. It is grandstanding and the typical class warfare tactics that the Democratic side loves to employ of the worst kind, and she seems to have no real grasp of how government even works.) KAPTUR: The first two items I want to mention would just be a reporting back from your staff to the committee. I would like your staff to provide a complete list to us of which Wall Street firms are earning fees off the sale of the array of U.S. debt securities; to provide a list of which firms from 2000 to the present and the amount that each has been paid annually by U.S. taxpayers for conducting those transactions. That's the first request. (Just a couple things to mention right away after this moronic request. I don't want to spend endless time here explaining to you how the system works regarding the issuance of new debt securities by the United States government, but I will tell you that the United States Treasury Department would have been the appropriate agency for Ms. Kaptur to direct her request to. After all, they ARE the ones who are in charge of such things. Secondarily, when "primary dealers" participate in the auction of new issues of Treasury securities, the commission amounts they earn are microscopic and dictated by the government besides. I would argue that these commission rates are likely some of the absolute amounts earned by Wall Street firms and amount to nearly nothing in terms of the revenue earned by the firms or spent by the government. Do you think her request and her upcoming questions might have been at all prompted by the fact that the bonuses of Wall Street CEO's had just been announced in the days prior to this committee hearing? Hmmmmm. Now I'll let you read some more of this windbag's idiocy.) Number two, based on your testimony, in order to
help to create a savings consciousness in our country, particularly
among the young, I would invite your cooperation and suggestions
on how to create and promote a public debt postal savings stamp
program to sell the debt to our own citizens, including our youth,
in small denominations, as the Japanese have done through their
postal savings stamp system and Franklin Roosevelt created in this
country during the 1930s. I would value your suggestions there. I wanted to make a comment and then ask two questions. The basic theme that runs through my comment is that our capital markets have to be held accountable in solving some of the problems that we face in this nation, and that our economy is in uncharted waters. (So congresswoman, the current mess is NOT the fault of the government, but the blame actually lies at the feet of the capital markets. I would venture to tell the congresswoman that while we might be in uncharted waters, it has been the government's hand on this tiller that steered us into them.) As you say, we have very high debt levels. Our public debt, according to your testimony, amounts to 37 percent of one year's GDP. And if you add to that the fact that the trade deficit knocks off an additional point off that GDP, that's well over half of the growth that doesn't benefit economic investment in this country. Our middle class is shrinking. I used to say that these conditions were resulting in the middle class running harder to stay in place. I now say the middle class is running harder, but falling behind, as reflected in their rising debt levels and net negative savings. Factory workers in my district are working six days a week, 10 hours a day, week after week, month after month, and we still see the hemorrhage of jobs. (No offense congresswoman, but what does this matter? Other workers around the world are doing the same work for dramatically smaller paychecks. What solution would you offer other than additional entitlements or government handouts?) They're being told the reason for their predicament is that they're in a knowledge economy and they're falling behind because they're not smart enough or that the problem is -- in your testimony, well, the fact is we've got too many people getting older. I beg to disagree. (Is she disagreeing because she is more knowledgeable about the issue than the Chairman of the Federal Reserve and has better facts to support her case, or is it something else? Let's see.) I think what's happening is that capital investors have figured out how to make egregious profit by outsourcing jobs to very undemocratic places and then reimporting those goods here, because our trade policy is snuffing out jobs and we have a tax policy that rewards it. (SEE!! It's the capital markets and the free market economy that's screwing those factory workers in her district. Although there is also some blame for our trade and tax policies too.) And we don't have a redistributed income policy that helps our people to keep up in view of what's going on. (Now we're definitely getting somewhere with regard to her ideas. We need to jack up taxes on the rich and the upcoming Exxon-Mobil and redistribute that money to those factory workers in her district.) ExxonMobil, I guess, is my key example of where
we're out of whack, out of sync. And, number two, nearly 95 percent of recent issues of U.S. debt instruments have been purchased by foreign buyers. Why are they the purchasers, rather than American investors? BERNANKE: Well, on the first question, I should first point out that it's not in the interest of China or Japan to dump treasuries on the market. They, themselves, would suffer capital losses from doing that. I do think if there were -- and I should be very clear, I have not information or expectation this is going to happen. But if there were significant sales by foreign central banks, for example, that there would be some short-run effect on the market, in terms of the currency and interest rates probably. I think the longer-term effect would be somewhat less because the market would adjust. It is a liquid market. And the holdings of, say, China of U.S. debt securities, including both public and nonpublic, is only about 5 percent of the total credit market outstanding. So, obviously, we're watching that very carefully. I don't see that as a major threat to our financial system or our economy. I'm sorry, the second question was? KAPTUR: The second question is: Nearly 95 percent of recent issues of U.S. debt instruments have been purchased by foreign buyers. Why are they the purchasers, rather than American investors? BERNANKE: Well, a couple of reasons. One, as we talked about before, is that Americans aren't saving that much. And you have to save in order to buy assets. And so that's part of the problem. The other is, interestingly, that Americans seem to have a stronger preference for equities and riskier investments than, particularly, foreign central banks. So at the same time that foreigners have been acquiring fixed-income instruments like Treasury debt or GSE debt, a lot of American investors have been purchasing either domestic or foreign equity, which pays a higher return but is also riskier. So there's a bit of diversification going on in both directions for investors. But, again, the low rate of savings also contributed to that. KAPTUR: Doctor, could I just ask you, on the first two requests I had for data, on providing a list of those brokerage firms, can you provide that to the record? BERNANKE: I'm not certain that we can, but we'll do our best. (So let's summarize all of this. We need to get tougher on our capital markets and definitely put the squeeze on those Wall Street firms who are making thousands and thousands of dollars a year off of the government. We also need to need to move to a more regressive tax policy that taxes those fat corporations and rich individuals so we can redistribute those monies to factory workers in Ms. Kaptur's district who are working six days a week, 10 hours a day. Because, as we all know, those wealthy individuals hardly have to work at all to make their money. And finally, we need more restrictive trade policies so that the U.S. can no longer import those low cost products that line the shelves of every American store. It's clearly about time that Americans should be paying double and triple the amount for goods produced right here in the good 'ol US of A. Boo Yah!) LLYOD DOGGETT - DEMOCRAT OF TEXAS: One last one. Some of the questions I've heard here this morning seem to suggest that we don't need to worry about revenues or tax shelters or tax savings or whether corporations are paying their fair share; that all we need to be concerned about is that grandma's Social Security check is too big. And without minimizing our need to focus on entitlements in 2030, you're certainly not saying that, as we look over the next few years of the budget we're developing, that we don't need to consider both the revenue side as well as the expenditure side. BERNANKE: No. It's the Congress' responsibility to look at all the options. And I'm not going to take one side or the other, but I think that you should definitely consider all options and try to balance the costs and benefits of both sets of approaches. (You do have to appreciate the spunk exhibited by the Democrats here. What paints a better visual for people than Grandma clutching her Social Security check when trying to determine what is the most important issue for Congress to address? Even though Bernanke has painted such a dismal picture of the future because of the looming entitlement tsunami, we might as well just shift the focus to tax shelters and corporations and avoid the real problem.) PAT TIBERI - REPUBLICAN FROM OHIO: One final question, Mr. Chairman. (I'll confess that this is definitely my favorite question of the entire hearing, where Congressman Tiberi tries to argue that it isn't really the case that the U.S. savings rate is too low. It's simply that the way we calculate the savings rate that's the culprit and there is NO way for to convey how the blowhard congressman pontificates and lectures the Fed Chair in this diatribe.) Following up on Mr. Campbell's point about the savings rate, it appears to me that a family that rather than puts money in a savings account but quickly pays off the 30-year mortgage and has equity in a home isn't -- the current formula isn't showing that positive benefit for that family's perspective of paying off a home. Yet if they had not paid off the home and put that money in a savings account, it would have shown a different picture. What can we do to paint a more accurate picture of America's savings? BERNANKE: Well, actually, the increase in the value of the home due to a rising real estate market, for example, would show up in the Federal Reserve's measures of household wealth. So we do capture it in wealth measures as opposed to savings measures. The example you gave of paying down the mortgage, if I put something aside from my paycheck in order to pay down the mortgage, that, in fact, gets captured as saving because that is part of current income which is not being consumed. It's being used to pay down debt. That would be part of saving. TIBERI: Oh. Thank you. (Oh dear Lord, what a moron! God help us everyone if these are the sorts of mental midgets who possess the gigantic responsibility of doing something about the country's fiscal future. Just the typical recent Republican response to far too many issues these days: "we'll grow ourselves back to health". I'm sorry to counter that when someone is this sick, more serious medicine will need to be consumed, and trying to change the way we calculate the savings rate is not the answer to our negative situation. It seems clear that nothing meaningful is going to be done until the medicine will be extremely difficult to swallow.) YOUR FEBRAURY BRAINTEASER I've received plenty of notes from people who tell me that they miss the mathematical/analytical questions, so I will try to oblige those readers this month. Here is your question: "Which of the following names is the least
like the others? Good luck, and when you can't take it anymore you will find the answer at the following link: http://www.afs-seminars.com/brainteaser_Feb2007.html The answer to the January brainteaser is as follows: The Hudson Bay Company is both the oldest corporate enterprise still in existence and was the largest corporate landowner in history. Founded in 1670, its realm once covered nearly 3 million square miles and the company now operates the largest department store chain in Canada. Copyright 2007, Michael Gasior. All Rights Reserved AFS Seminars LLC |
||
Home | Register | Courses | Course Locations | In-House Seminars | Consulting Services | 2008 Schedule Newsletter | Video Commentary | Radio Shows | About Michael Gasior | Glossary | Alumni | Links | Contact Us |
|||
AFS Seminars LLC:
500 Chamberlain Hill Rd. : Middletown, CT 06457-5564 Tel: (860) 347-6568 Fax: (860) 347-6258 |
|||
Material Copyright © 2008 AFS Seminars LLC |
|||
February 2007 Newsletter
