Posted by Paul Vignaon February 23, 2011 Economy /
Comments Off
Sorry you lost your job, kid. Here, have a Fresca.
I seem to recall that one of the selling points for the government bailouts in the wake of the Panic of 2008 was that the private sector had to be saved if we were ever going to create jobs again in this country. It was sold as that we weren’t so much bailout out a bunch of private players that wreaked havoc with the economy so much as we were preserving a system that would help repair the damage done to the citizenry. That we were, in effect, bailing out ourselves.
I think we can close the book on that one as a big fat lie. The private sector has done very little, especially considering how much they were given, to get the jobs market back to health. Hiring’s going nowhere and wages are going nowhere. But corporate profits have soared. Meanwhile, with the government picking up the slack for what the private sector isn’t doing, federal debt has soared. But GE can work the tax code to the point where it effectively pays no corporate tax.
Gluskin Sheff’s David Rosenberg lays it out for you:
The U.S. corporate sector gets bailed out by the taxpayer in unprecedented fashion, to only then see said corporate sector experience a surge in profits without having to increase the size of the workforce very much, if at all, or increase pay to their staff so they can share in the spoils, for that matter. What the government then does is replace the business sector’s role in doling out wage increases to the working class to the point where a record 20% of personal income is now derived from federal transfers.
This is the principal cause of the U.S. deficit soaring to unprecedented heights of $1.5 trillion and it is so obvious from the latest White House budget that there is no realistic plan to redress the rising tide of fiscal red ink. But the major point here is Uncle Sam’s generosity has given the proletariat the leeway to spend, thereby helping support volume growth in the corporate sector and further widening out profit margins, which were already underpinned by declining unit labour costs. And the stock market rallies to new cycle highs. What an economy! What a market! Boom times with a 9%+ unemployment rate and a 16%+ underemployment rate.
I’ll tell you what, my bus pass going up by 25% is annoying, but I sure am glad I’m not poor and living in California:
Proposing a budget that would eliminate the state’s welfare-to-work program and most child care for the poor, Gov. Arnold Schwarzenegger on Friday outlined a stark vision of a California that would sharply limit aid to some of its poorest and neediest citizens.
His $83.4-billion plan would also freeze funding for local schools, further cut state workers’ pay and take away 60% of state money for local mental health programs. State parks and higher education are among the few areas the governor’s proposal would spare.
You think Schwarzenegger ever thought he’d have to draw up a budget like that? But that’s what you have to do when you have a $19 billion budget gap that you have to by law balance and you don’t have a currency to debase. In fact, if California didn’t have the implicit backing of the United States government, you can bet it’d be in the same boat as Greece, Spain and Portugal. And even after cutting off welfare and daycare, the state’s still going to need what amounts to a bailout from the federal government to close the gap.
Personally, I’d close the parks before I’d cut off the schools, but still, didn’t California go through this same thing last year? Yes, they did, and the fix then was widely seen as a band-aid, and this year’s budget is proving that.
None of this is rocket science. The problem that’s plaguing the developed world is too much debt, and the more we tried to work around that, through second mortgages, or off-balance sheet accounting, or just taking out a fourth, and a fifth, and a sixth credit card, or by governments that just continuously roll over their debt but never pay it off, the deeper we dig our own graves.
The credit crisis that first splashed across the globe in 2008 hasn’t gone anywhere. The debt is just moving up the food chain. Greece, Europe and California are proving that.
My tab for riding NJ Transit went up 25% per month in May. If that seems like a big jump, it is. But I’m lucky. In addition to jacking up fees, NJ Transit cut routes, so some commuters (but not me) are losing their trains and getting squeezed into other, now more crowded lines.
In New Jersey, we’re already getting hit with forced austerity. So are residents in California, New York, and several other states. The tab for the multi-decade debt binge is coming due. The problem is, too many people are still pretending it isn’t sitting there on the table.
But it is. You’d best wrap your mind around higher taxes, fewer services, and “austerity” being forced upon the U.S. citizenry with the same absolutism with which it’s being forced on the Greeks and Spanish. Because U.S. debt is near a tipping point beyond which we will not be able to just “grow” our way out of it anymore, and that means more drastic measures will need to be employed. All that austerity stuff you keep hearing about.
And “austerity,” in case the Greeks riots haven’t hammered the point home, in this case is a euphemism for “pain.”
Reader J.C., after I wrote in Tuesday’s closer about the deficit levels, passed along a recent research report from Citi’s Willem Buiter, who goes into a very detailed look at national finances (it’s not pretty, we’ll get to it.) “It’s not so much the deficit as the debt,” J.C. wrote, and added that interest rates play a big part too. But the bottom line is, once we pass 90% of debt to GDP, we won’t be able to earn our way out of the debt hole.
“The arithmetic of public debt dynamics is simple but inexorable,” Buiter wrote.
Yesterday morning, I sent an email to Barry Ritholtz over at The Big Picture, and author of “Bailout Nation.”
“Looks like you’ll have to rename your book for the second edition,” I wrote. “Bailout Planet, or Planet Bailout.”
We’ve gone from bailing out individual home owners, to corporations, now to entire nations. And I do mean “we,” Mr. and Mrs. America and all the ships at sea. The U.S. taxpayer is on the hook for this one, again, through our contributions to the International Monetary Fund, of which the U.S. is the biggest contributor, and also through the Fed’s reopened “swap” lines with foreign central banks, which are essentially short-term loans.
So, as you sit there drinking your Pasbt or Coor’s, or sipping your California chardonney, stop thinking that this European thing doesn’t touch you. It does.
Why can’t anybody just take a loss anymore? Why are we so desperate to bail out everybody? Is anybody else bothered by the fact that it seems like absolutely nobody is made accountable for their actions, except, like, you know, you? Oh, no I’m not. John Mauldin of Millennium Wave Advisors got the flyer too:
Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 billion in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees.
The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. You do not solve a debt problem with more debt. This only shoves the football a few yards (or maybe I should say meters) down the field. And it is going to cause a massive misallocation of capital once again which will create more imbalances that will have to be dealt with. Ugh.
You can say the Europeans had no choice, I get it. The same argument was made in the United States after the government hatched the TARP, and hundred other bailouts I can’t even remember right now. But the debts weren’t extinguished, they were only passed from one balance sheet to another. Now the same thing’s happening in Europe. Meanwhile, the credit crisis is moving up the food chain.
This morning’s data weren’t exactly anything to write home about; the services sector stalled in April, and ADP said private-sector job growth was just 32,000. Now, Friday’s “official” report should be greater than that, but it’ll be mainly on those temp jobs the Census Bureau’s offering. If the private sector isn’t producing a lot of jobs, we’re going to stuck where we are for a spell longer.
Oh, and Greece is a mess, and the great fear is that the rest of Europe isn’t too far behind. All that and a bit more in today’s Tomorrow’s News Today (for which, for some reason, I don’t have the coding to embed, which is a bit annoying.) And, we actually have a bit of good news, too: the Treasury’s trimming its funding needs. A bit. Still, it’s less than it was.
What else do you need to know about? The market loves ObamaCare (right?), but nobody in Europe more and more looks like a bunch of squabbling children (like Lord of the Feta, or some such thing.)
Partisans will try to pin any selloff on last night’s vote on healthcare reform, which depending upon your political leanings is either historical or Pyrrhic. But there are other factors at work, and besides, the bill doesn’t even go into effect until 2014, so there’s still time to make hay.
There are other things of more immediate import going on, like the resolution of the Greek situation. With the EU holding a summit meeting, and with time running out for the Greek to get their funding in place before they have to turn over something like $20 billion in bonds in April and May, this week has all the makings of a Rubicon-type event (I know, that’s a Roman, not Greek, reference, but you know, if the sandal fits…)
The Brussels summit begins on Thursday, so we have three full days to twist in the breeze while this whole drama drags on. This is pressing down on the euro, which is driving up the dollar, which lately has been a heel on equities. So as much as Kudlow will probably be ranting by 11:30 a.m. that the market hates the healthcare plan, it ain’t that. It’s the Greek thing.
And for as much as this story seems to change hourly, the basic outlines have not changed at all: the Greeks fibbed for a decade, ran a dangerously profligate nation, and need a bailout. The prim and proper Germans don’t want to bail them out.
The downfall for the Trojans, ironically, was what seemed at first like a victory: during one particularly brutish battle, Hector, the best of the Trojans, killed the great Achilles. Least, he thought he did. As it turned out, of course, he’d killed only young Patrolcus, Achilles dear friend who’d gone into battle wearing Achilles’ armor while the great Achilles was off skulking because Agamemnon had stolen one of his war prizes, a certain Trojan named Breisis (these Greek stories are always complicated.)
The idea was to scare the Trojans into thinking Achilles was back in battle; it worked initially, but Patroclus got a little big for his britches, chased the Trojans back to their great walls (which Achilles warned him against doing) and went and got himself killed.
The killing so enraged Achilles that he did go back into battle, and killed Hector, which presaged the end of Ilium and the Trojan empire. The current Greek drama has been almost as drawn out and convoluted as the Trojan War. And while earlier this week it seemed it all might come to an easy conclusion, it’s worth asking if we’re at the point in the story today where Patroclus is dead.
Greek Prime Minister George Papandreou warned Friday that Greece is one step away from being unable to borrow on international markets, and appealed to the country’s unions for their support.
The problem for the Greeks is that they face the very real prospect that servicing their debt will become so expensive it will overwhelm any belt-tightening. The government is getting squeezed on the one hand by the Germans and French, who are demanding a pound or 30 of flesh, and the unions on the other hand, which are adamantly against submitting to what they perceive as outsiders’ demands for that pound or 30 of flesh.
As the Greeks tear themselves apart trying to come to grips with their precarious situation, here in the United States, people are looking at the Argives’ problems and wondering what if any lessons we can draw from their woes.
The general perception seems to be that while the United States and Greece have some things in common, like big deficits, the differences between the countries are so great that there is scant to learn from the Greek crisis. But Greek stories always have something to teach us.
With the Greek prime minister in town last week, the Associated Press set about trying to draw the appropriate lesson for the United States. “Greece is a financial basket case, begging for international help,” Tom Raum asked. “Is America heading down that same road?”
It’s a valid question. But to get the right answer you need the right comparison. The United States of America is not in the same shape as Greece (although, at the rate it’s going…) But the states that make up the United States? On the state level, Greece’s problems are already here. Much like Greece, much like the federal government, the state governments have racked up huge debts, have resorted to any number of budgetary gimmicks, and now that the economy has turned down, the feta’s really hitting the fan.
What the Greeks are having forced upon them — austerity — states like California and New Jersey are adopting on their own, with oftentimes painful, but necessary, results.
I haven’t posted much the past two days because I was working on an “Ahead of the Tape” column for the paper, which came out today, “U.S. Borrowing Costs Stay Stable. For Now.” Here’s a taste:
The budget report isn’t a market mover, one reason it gets released during market hours. In the short run, investors are more or less “comfortable” with large deficits, says Dan Greenhaus, Miller Tabak’s chief economic strategist.
Long term, though, is different. “The lack of a credible plan to reduce the deficit as a percentage of GDP will eventually weigh on investors’ minds, which could have implications for currency and debt markets,” Mr. Greenhaus says.
Erasing the deficit seems intractable, because much of it—like health care and Social Security—is mandated. Military spending isn’t, but isn’t likely to come down amid two wars. The next-biggest government outlay is interest on the debt. And that’s where the debt markets get, well, interested.
Low interest rates don’t just help the housing market. The government’s managed to actually pay out less in interest while the total amount of debt has risen with all these historically low rates. The real fear, of course, is that the bond vigilantes will start making the government pay up for its largesse.
Our colleague Deborah Blumberg touched on this in a story in Monday’s Journal. There’s an auction of 10-year bonds today at 1 p.m. ET, and keep an eye on how that one plays out. If you start seeing yields on auctioned debt higher than the debt trading in the secondary market, it will raise some eyebrows.
J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees […]
David Oreck, founder of a well-known maker of vacuums and air purifiers, says he’s upset his namesake company is in bankruptcy. He says Nashville, Tenn.-based Oreck Corp. was a perfectly profitable company when he sold his stake in it to a private equity firm in 2004. He blames the firm, New York-based American Securities Capital […]
