Congressional Logic: Insanity Mixed With Self Importance

Congress almost shut the government down because both sides couldn't come to an agreement over a 40 billion dollar cut in the budget. That's hard to fathom let alone comprehend their thinking.

The pie chart below shows how much government took in taxes in 2010, $2.162 trillion dollars.

Now look at how much they spent, $3.456 trillion dollars. Our government almost got shut down over some petty change issue?? Spend $3.456 trillion and the taxes received were $2.162 trillion; hmm where did the extra $1.3 trillion come from??? It must have been a loan! No thought of cutting here.

Uncle Sam paid $413 billion in interest on the national debt in 2010. Figure the government is paying 3% on funds borrowed. What would happen if interest rates doubled to 6% like they have in Greece? A possible jump from $400 billion to $800 billion in interest charges doesn't even faze those in Congress. $413 billion dollars in interest, is paid out each year. How many taxpayers does it take to pay, just the interest?

Somehow, the phrase "penny-wise and pound-foolish," seems to have lost its meaning. The $1.3 trillion dollars borrowed is real, in the sense that it is gone. What would be the monthly repayments on $1.3 trillion dollars borrowed for 20 years? Of course, if you don't plan to pay it back, who cares? That appears to be the way Congress plans to handle it, and that's insane. It's kind of like trying to retire on the bonus dollars you get back from using your charge card.

Last week's Congressional Brouhaha,(to paraphrase Shakespeare from Macbeth) was, "a tale told by an idiot, full of sound and fury, signifying nothing."

The Impending California "Bankruptcy"

State employees want every dollar promised to them and nothing less. California has one minor problem, a lack of funds. In the past when times were good there was always a way for the States to generate new funds with bonds and fee hikes. Adding to this deep pockets concept, the Federal Government doesn’t need a balanced budget, they can print dollars. Everything can be funded-----Right??? To the average voter, the lack of funds is a political, rather than fiscal issue. In reality, it is the other way around. It’s a fiscal issue, at the State level that is getting worse.

The Damn Republicans are tightwads and don’t want to spend the money. The Democrats are sobbing die heart liberals that are going to save mankind. Take either side, it makes no difference. Notice though, lack of legislative funding will terminate State government worker paychecks in a rather sudden way. They might keep police and fire departments running, but for how long. Who pays for the gas in the squad cars and fire engines? The Police in Illinois can’t use State credit cards for gas purchases. Stations refuse to honor them; the state is considered a deadbeat.

Governor Brown of California wanted to have a special election for raising new taxes and the Republicans wouldn’t go for it. The previous governor (Arnold) tried it and it went nowhere. Can you envision a line of people, enthusiastically waiting to vote to raise their taxes in a special election? You have to be smokin' something for that to seem half way real.

The 25 billion dollar shortfall for California’s budget could be more like 65 billion—it depends on who is doing the books. All of the accounting tricks are starting to unravel. The people running the government are people just like you and me;-----understating the bottom line isn’t really lying. I suspect that current tax collections for next year’s budget have already been spent in this fiscal year (a minor bookkeeping anomaly).

What happens from here? California is broke; it can’t pay all of its bills. Of course the concept means nothing to the average citizen. It has never happened before in our life time. To most people, it is an impossible event, it can’t happen. “Where is my paycheck!” will be the cry from State workers. And from there, the real world will be seen again as it is, for the first time in 80 years. The option to pass a bond issue, and kick the can down the road another 4 years, is over. The shortfall of 25 billion has already been spent and we only have 3 months before the new fiscal year begins and California has to have a balanced budget.

If there isn’t enough money to go around, then who gets paid by the State? The bigger question, who doesn’t? The answers will be forthcoming-- from who-- well, that’s hard to determine, but you can bet your bottom dollar that it involves a lawyer.

The Invisible News

Japan had an earthquake, tsunami and a very bad nuclear accident, with the loss of ten to thirty thousand lives. There has been no mention of possible U. S. insurance claim involvement for Buffet and AIG.

Then we have the Euro, a currency renown for its flatulence. The European Central Bank is going to save the European Union,---from what, they’re not quite sure of at this point. It depends on which country you live in.

The Middle East has people rising up and demanding an end to the tyranny. Our newspapers Stateside, translate that as a demand for Democracy. Where is their middle class, the necessary ingredient for a stable Democracy? Gee, they don’t have one, just a few rich people and a hell of a lot of poor people (that want to be rich).

I’m glad to see Obama finally going after the pirates attacking our shipping. Unfortunately he got his countries mixed up. Somalia, not Libya is where all the hostages are. Thomas Jefferson already did Libya. The UN’s effort to make Libya a “No Fly Zone” is admirable. I hope they include Fruit flies along with House Flies. God bless these UN health initiatives. Kidding aside, getting rid of the present regime will not solve any of Libya’s present social unrest, and it will acerbate survival for many in the country. The UN lost points on this. The Arabs are more into religion than material wealth, and they will remember what the UN (the Christians) did to an Arab brother.

At home, there is a hiring freeze on all new government employees. And if Congress fails to keep on passing one of these temporary budgets every two to three weeks, the Federal Government won’t be able to meet payroll. Government employees are anywhere from 3 weeks to one day away from being layed off. It depends on how close it is to payday. Come Friday, if they tell you not to come to work Monday, you can’t whine about not being paid a week later, now can you?

Our dollar is buying less gas, food and utilities, and that's just not world news. Of course, if you live in the Middle East, you may beg to differ. Bernanke’s inflationary policy is changing the world. Everyone’s currency is buying less. In the US, we cut cable and the extra vacation. In the Middle East, it’s the amount of food on the table that gets cut.

The real news in the world is not about a move towards Democracy, it is revolt against perceived injustice. There is a lot of anger out there. It’s in Wisconsin, Egypt, California, Libya, Illinois, Tunisia, Nevada, Mexico and Florida to name a few.

I’m thinking of discontinuing the newspaper, not much in it any more. The depression is over, we’ve licked inflation, the national debt is no longer a problem and stocks are bouncing off of new highs.

Inflation, What Inflation?

Let’s look at inflation in another perspective. Figure a worker making $12 per hour that comes out to about $24,000 per year, or $500 per week

Figure one tank of gas per week has double---$25 (extra)
Groceries per week have doubled----------------$50 (extra)
Utilities have increased-----------------------------$20 (extra)
Cable, sales tax, state license fees--------------$ 5 (extra)
Total---------------------------------------------------- $100

So when we do the math, the minimum wage worker has had a 20% haircut. In the span of a year, that is a loss of $4,800 in buying power. You get the same paycheck; it just doesn’t go quite as far.

The well off person with 100K in the bank has lost 20K in buying power. Of course, that really isn’t perceived by the saver, he can get the cash and dance all over the bedroom throwing 100k in one dollar bills everywhere. The concept that his savings have somehow decreased is not at all obvious, after all he still has every dollar.

PIMCO dumps all of their Treasury bond holdings? I wonder what they replaced it with, gold, silver, oil?? It seems the message here, is if you have cash, don’t loan it out for peanuts, rates are going to have to go higher. Student loans could be the goose laying golden eggs. A student with 200k in debt at a future 12% interest rate, amounts to slavery. Of course, how could interest rates ever get that high???

With all of the real estate “under water,” picture Bernanke in a boat named “The Economy” drilling a hole in the bottom of it--to correct this mess. That’s what inflation is all about, the boat is sinking---contrary to popular belief, the water isn’t rising.

So those earning the minimum wage pay the piper big time. If you earn double their wages, your pain is a lot less. If you are retired and living on your savings, you got nailed. The funny thing is, things really haven’t gotten bad--yet. The hourly wage hasn’t been cut, but your spending power has. It’s very invisible and “painless.”

The Great Depression of the 1930’s rang true, because of the belief, that things could get even worse. People were not in control of their lives. All hope had been abandoned. People got sick of hearing that “Prosperity lies just around the corner.”

It will be different this time. All of the people we blamed for the last depression are dead. I think we can excuse them for dying, it wasn’t a planned event.

The Land of Unintended Consequences (Reprinted)

This is a reprint of something I wrote back in May of 2008. It's dated, but things haven't changed much, except for administrations. Hopefully I'll have a new post by Thursday.

A Time magazine article April 4th pointed out that 1/5th of our corn crop was diverted (hijacked) to ethanol refineries. Corn prices have shot up and American farmers are planting less soy beans. Brazil in turn has increase soy bean production. Of course they are burning down a rain forest to do it. This ethanol lowers our dependence on foreign oil and at the same time increases the price of beef. We get to save a dime on gas and get to choke on the price of ground round.

20 years back in Africa, the UN showed starving people in one country how to plant crops and use fertilizer. The net result was increased food production and an increase in population. One thing little noticed was that families needed firewood to cook with. Once the country was denuded of trees, the farm land washed away with the rains. A great plan ran amok because of firewood. People died as a result.

The government and Congress are going to save Bear Stearns, Countrywide, give everyone who paid taxes $600 dollars and keep the economy out of a recession. You know they mean well, but maybe just doing nothing might be a better approach. My only question is this; whose money are they going to do it with? Don't they have to tax people to raise the cash? We are going to poorhouse in an air conditioned limo! Forget the hand basket to hell, that’s step two (when YOUR healthcare runs out).



The voters seem to think the political party in power is responsible for our present situation. From a more realistic view, what we are experiencing today, is the result of plans put in motion 5 to 75 years ago. Clinton in 1999 signed the repeal of the Glass-Steagall Act (from the depression) which freed up the banking system (you can kind of see where that went). The final outcome could be the reverse of what was intended.

The real issue here is that the solution can result in a bigger problem. Note also, the people with solutions for everything, are usually part of the problem. Time is the only true test. The real estate market may seem to be just one issue, but it is intertwined with the banking system, the economy, Wall Street and government. Change one program and everything else moves in some unintended way. It's a little like taking Viagra, only to have your hemorrhoids swell up. You knew what you had in mind, and it certainly didn't involve a lot of pain! Our Government works, almost in the same manner.

Inflation, “Painless Taxation”

Inflation concepts are not taught in school, it is just something we are told to live with. Historically, it has ranged between 3 to 12 percent. Prices increase and employers raise pay rates to offset it. It lends to the perception that you are moving up with each “pay raise.” Notice as you “earn more” you tax rate increases accordingly. Congress doesn’t need to raise the bar, inflation did it for them.

What is inflation? In simple terms, it is the government printing money instead of taxing the people. But there is more to it, than that. In a normal economy we produce 100 widgets and get paid 100 dollars. You get a dollar for each widget. If the government needed 50 widgets, they would print 50 dollars, purchase them, and then consume them. Then there would be 50 widgets left for consumption and 150 dollars chasing the remaining widgets. The net effect is that widgets have jumped in price to three dollars apiece. This is what inflation is all about.

Inflation is too much money chasing too few goods. When Spain brought tremendous amounts of silver back from the new world, inflation took off. This was “real money” but there wasn’t any product to match to it, prices increased dramatically. The same thing is happening here. We get paid money for making product. When dollars are printed, the product is still consumed, but now there are more dollars chasing fewer products. The government can print money, but they cannot print food, energy, and housing. Government consumption, by way of food stamps and unemployment insurance, makes goods scarcer for consumption and prices rise.

The government taxes about 20% of our earnings through income taxes. With inflation there is no government paperwork. Let’s say you were lucky and saved up a million dollars before retirement and it took you 20 years. In this case, inflation is an invisible tax, you haven’t lost any dollars, but your dollars have lost half of their purchasing power. The government’s printing of money has confiscated half of your bank savings. The reason this government game works so well, is that the average person has a complete disconnect, between the concept of the real purchasing power of the dollar, and the apparent value of their savings. Their dollars are all there, nothing is missing---shhh, no need to upset them.

The politicians want to tax the rich; I suggest they are already doing an outstanding job of it. The sky rocketing ascent of the national debt is proof enough. Inflation is rampant if you include food and energy. We will see a dramatic loss of our purchasing power over the coming years. You won’t lose one dollar, but a dozen eggs could cost 12 dollars. Naturally, there will be a Congressional investigation into the chicken farmers gouging the public.

The thing that ought to make everyone angry is that inflation is stealing from those that saved a lifetime. You save hard earned money only to have the government make it worth less over time. Inflation is not perceived by our youth, it takes time to experience the reality of it. But, to those about to retire, they have experienced its effects. The silver foxes can see what it has done to their retirement savings and their plans for the future. Mention any of this to a Congressman and he’ll look back over his/her shoulder to see who you are talking to,--it can’t be him.

What’s next, ten dollars for a cup of coffee? -- And a dollar for cream and sugar? Of course with Obamacare, maybe I can get my doctor to write me a prescription for Bacon and Eggs with Coffee and OJ ( I have a $10 co-pay on prescriptions). That’s an inflation pill I can swallow.

Democracy on Life support

Democratic Wisconsin legislators leave the state so the legislature wouldn’t have a quorum to act on legislation. The reason being, they did not want to see certain legislation passed. If this isn’t an undemocratic act, what is? These representatives need to be relieved of their elected position and replaced. An example needs to be set here. Democracy works because of the vote, not from the lack of it.

The idea that the money is there, if it is spent “our way,” doesn’t float. Pay as you go or forget the trip. And that doesn’t set well with Democrats, social programs are their agenda, the funding is just not there. What is going to be cut? Easy answer, if you don’t pay taxes, whatever you are collecting will be cut. What’s that mean? They are cutting benefits to everyone that pays little or no taxes.

Some Congressman the other day defended not cutting Social Security entitlements. He stated that “Social Security is independently funded with no cost to the taxpayer.” What he said was true and very misleading. Congress uses this fund as a piggy bank. Our government has borrowed and spent the 2.5 trillion dollar Social Security surplus. What we need to look at, is the fact that the government can’t pay back the funds borrowed or meet the obligations of promised Social Security benefits for the future. In FDR’s time, 7/8th of the population was dead before retirement. That alone was enough money for the 1/8th that survived to collect benefits.

So let’s see if I have this right now. You pay in 12 percent of your earnings into Social Security per year and when you retire, you get to collect 10 times what you paid in. If this sounds too good to be true, then it probably is. To top that off, your contributed funds are not invested, they are spent that year on the budget. Of course the Social Security fund gets an IOU from Uncle Sam. The words “Congress” and “Pond Scum” seem to define each other here.

Then we have the word “Bipartisan,” repeated incessantly in every Congressional interview. It’s the panacea for what ails the economy. It translates from the Latin as “two parties together.” Today it is defined as “Complementary rectal loading.”

The States are literally falling apart and are bankrupt. Most have already spent that loan we gave them (over payment of 2010 taxes) (They will probably apply your refund to next year’s taxes). We have 5 months before the new fiscal year begins for most of the States, this is when it will "hit the fan."

It is becoming very apparent that something is wrong with government on the State level that cannot be fixed. Obama pulled a fast one on the Republicans in Congress with health care and now we have a similar situation in Wisconsin where the outcome is a given. In this case it was different. The Democrats got up and left the state; what they did was very un-American. Voters, not protesters make our laws--hmmm, I might be wrong about that.

Tongue in Cheek Solution for California Budget shortfall:

Governor Brown should send several armed ships to Somali to hijack oil tankers and hold them for ransom. The insurance companies would pay the ransom and California could then make its budget; 29 ships and 660 hostages held in that country is a travesty. The only reason they are there, is because piracy has become very profitable.

Naivety: A Political Definition of the Hoi Polloi

The Teabag movement is like a wave sweeping the country. Ride the wave, count the votes and get elected. I listened to several Tea Party home town meetings and it was summed up by one moderator, “We will stand behind you [the Congressman having the town meeting] in making those cuts in spending.” What these town hall meetings lacked in youth, they more than made up for with participants my age or older. When it comes time to make cuts; out comes a list of things that can’t be cut. That there, gives you an idea of how serious the concept of cuts are. Of course, the cuts I deem reasonable are not the ones my neighbor agrees on, so how do we cut any program? The solution was simple, until we tried to implement it.

Then we have an 8 trillion dollar commitment guarantee to save the Fanny and Freddie GSE’s (prop up property prices). Add to that, about 4 trillion in insurance guarantees to bail out the banks, some of which are “too big to fail.” Actual out of pocket so far, is a vague amount. It is kind of like throwing a party on a budget. When you see the estimated bill, for 10 cases of vodka, two hookers and 1000 condoms, you know the party isn’t going to be as advertised; expectations for the hookers were set a tad too high.

Let’s move to Egypt. The people there think that they have overthrown a dictator. I can’t quite figure that out. The dude Mubarak was 82 years old. All they had to do was pop a paper bag behind his back to induce heart failure. I think all this guy wanted to do, was die in office and get the tribute of a free State funeral. It’s not like he needed to kill a few more people to keep the regime going. The country has been a dictatorship since 1958. The youth of the country think that things have changed and they are now in control, the naivety of their thinking will be tested very shortly. The Egyptian military still runs the country.

So where are we now? Everyone wants change, but the money needed is not there. We can have less, but not more. The Well is dry. Obama proposes a budget of 3.7 trillion dollars with a savings of over 1.1 trillion over 10 years (I guess the savings are all in the 10th year). Tax collections this year are about 2.1 trillion. Here we have a President standing up and announcing a budget that is underfunded by 1.6 trillion dollars claiming a savings of 1.1 trillion over 10 years. The real implied statement here is that the President thinks the general population is dumber than a sack of rocks. I don’t have any problem with that; I think he’s on to something. I get irate for being grouped with the Hoi Polloi (the sack of rocks).

Our political representatives have promised us that lobster and steak dinner and believe it or not, they are going to serve it to you at McDonald's. It looks like three card Monte and selling well know bridges are passé. I’m getting hungry, let’s go to McDuck's for Surf and Turf!

Things Change Over Time

In the 1930’s, Social Security was for those over the age of 65. Very few people lived to be 65. Smoking wasn’t going to kill you, old age was. Penicillin and new medical treatments later on in the century extended our lifetimes tremendously.

Back in Abe Lincoln’s time, health care wasn’t a big expense; you either died or got better. Today you can exist in a coma for years; premature babies can cost 100k apiece. The personal concept of paying for it all doesn’t exist. Just who pays for all that is another story. Now we have government health care for those who can’t afford it. The private insurance companies can see the handwriting on the wall; you can’t compete and undercut the price of government programs, the government doesn’t have to make a profit to survive. Look for private health care to fade out of existence.

Home ownership after WWII was considered a God given right. Private financing with acronyms like GSE kept the game going for 50 years. This financing plan has pretty much collapsed. The Federal Reserve and Congress stepped in to provide the funding to keep the ball rolling. When the game started, you needed a 20 percent down payment. Just before the collapse, the banks were writing loans to anyone that could fog a mirror. Now the government has extended the “fog a mirror” program; of course you have to “buy” one of the zillion homes they now own.

40 years ago, government jobs were very low paying. Most people went to work for private industry. Of course many people started working in government to get some experience and then jumped into the private sector. In today’s world, the government does surveys to figure out what to pay employees so “they won’t lose them to the private sector.” They weren’t really losing anyone at that pay rate; they were inconvenienced with the fact that they had to train a new employee. Yesterday’s low hire government employee is today’s retiree with the Rolls Royce health and pension plan.

When I went to school, it wasn’t hard to flunk a grade and get set back a year. I remember a guy graduating in my senior class, was 21, real nice guy, he was more into cars, girls, cigarettes and beer. He had a great time in High School. There were probably 4 straight A students in my high school with 800 students. My son who graduated from high school last year was a straight A student, as were many of his class mates. There are so many straight A students in today’s world, that it is meaningless. No kid left behind has pretty much trashed the educational system. The kid selling drugs on the sidewalk is getting more of a math lesson than the stoned kid in class who bought the weed. Success today, is guaranteed to our children; then they hit the reality of the real world, after graduation.

When the Constitution was written, there was the right to bear arms. If you ever want a fun time, try to load and fire a flint lock pistol from that era. When you pull the trigger, the intended victim has about 1 ½ seconds to dodge the bullet--- the flint hits the steel which lights the gunpowder in the flash pan, which ignites the powder in the barrel, which launches the bullet. It could probably misfire one out of three times. It’s not much like the weapons they sell in the gun stores today.

The invisible issue here is that things change over time very slowly. But our perspective doesn’t. We still see the program in its original design. The change has escaped us, but the penalties haven’t. The bill is coming due and everyone has all these entitlements they have been promised. It’s kind of like enjoying a full meal in a very expensive restaurant and informing the waiter that the next person to sit in your chair will pay your bill. The waiter will have none of that no matter how indignant you get. Reality is right around the corner, let’s see if we can kick the can that far.

Let's Define "A Depression" (Reprinted)

Here is a reprint from May 13, 2007 that you may enjoy. It is a travel back in time 4 years.

Let's define a Depression:

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse could result in a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.

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