"The most significant threat to our national security is our debt," Admiral Michael Mullen, Chairman, Joint Chiefs of Staff, August 27,2010


Wednesday, October 28, 2009

Too Big to Fail - who ya' crappin'

What a nonsensical cup of kool aid provided by a sinister cabal of managers, employees and union members of the “too big to fail” outfits and the bureaucrats who were supposed to oversee the activities of the “too big to fail” outfits and didn’t. So these groups go to their co-dependent enablers in DC and beg for handouts and loans and guarantees and stimulus payments and their political sycophants wring their hands and say oh woe unto me and the poor taxpayer and they huddle with their knees knocking, terrified that the excretion will hit the oscillator and they will be responsible so they say, “too big to fail”, oh woe, oh woe, and eureka, they write checks on other peoples accounts and then they run around saying we saved it, we saved it, oh how wonderful we are.

TheFundamentals has composed a historical list of organizations, individuals, entities and gatherings deemed to be “too big to fail.” Please add your own as we were limited by time and interest.

Ma Bell (1885 – 1984)

Roman Empire aka SPQR (27BC - AD476/1453)

Packard Motor Company (1899-1958)

Brooklyn Dodgers (1883-1957)

British Empire (1583-1945)

Union of Soviet Socialist Republics (1922-1991)

Third Reich (1933-1945)

Edsel car (1957-1959)

Methuselah (969 years)

Noah (950 years)

Adam (930 years)

All gone; sun still rises.

Here are a few of Barry, Barney and Ben’s too big to fail outfits:  AIG, Bank of America, Bear Stearns, Citicorp, Chrysler, Fannie Mae, Freddie Mac, General Motors and Goldman Sachs

Here are a few of Barry, Barney and Ben's real too big to fail outfits that you will never hear them mention:  UAW, AFSCME, SEIU, AFT, NEA, ABA, AFL-CIO and the 22 million getting a government paycheck.  As da’ coach used to say, “Who ya’ crappin’?”

The collective cost of these bailouts is measured in the many hundreds of billions of dollars; borrowed and printed money; all future claims against Ameican productivity. The solution.  A very simple and time tested concept, a fundamental. It’s called an auction. Ben, Barry and Barney, “Call an auctioneer.” Cash out and go back to buying votes and riding around in limousines and get out of the business of business. Who ya’ crappin’?

Monday, October 26, 2009

Revolution of 2010 ??

Please read the following excerpts from yesterdays Chicago Tribune editorial entitled - The revolution of 2010.

“The current generation of state lawmakers also contemplates the abyss of debt Illinois has excavated for itself and . . . only digs deeper. State government progressively approaches the "financial implosion" famously predicted three years ago by the Civic Committee of the Commercial Club of Chicago. For lack of stiff spines in Springfield, the unfunded liability of state pension funds alone now totals some $80 billion. State retiree health obligations? Another horrorfest. And every day these unmet obligations only grow. Republican and Democratic governors alike have approved budgets that don't bother to pay for many of today's costs -- chiefly pensions and other benefits for state employees -- with today's revenues. Short on cash? No need to live within Illinois' means, Springfield repeatedly has intoned. Let's just delay paying overdue bills. Or borrow billions. Or both!”

The editorial also includes a graphic depiction of the geography of the state with the caption, “state of corruption.” The above editorial can be viewed in its entirety at
http://www.chicagotribune.com/news/opinion/chi-1025edit1oct25,0,2682341.story

The editorial ends with the following, “The people of Illinois then will determine, come Feb. 2 and in the Nov. 2 general election, whether "The Revolution of 2010" is just a catchy phrase -- or an ode to the year energized voters change Illinois.”

Revolution is defined as a fundamental change in power and/or organizational structure within a short period of time. It can occur peacefully or otherwise. It the case of governments it does require a replacement by the people governed of the existing government structure and personnel.

Corruption is traditionally defined as abuse of power and personal gain by public officials and employees through illegal means such as bribery and extortion. Corruption is much more than that. TheFundamentals defines corruption as the forced excessive payment for comparable goods, services and labor than is either necessary or available and attained elsewhere by others for less.

For non Illinois readers, all that needs to be changed to make this editorial applicable to your state is the $$$ amount of unfunded state pension fund liability and the name of your state capitol. If you are skeptical, just click on the links at left under the captions “Feeding at the Public Trough” and “Within our Means.” The Tribune’s prediction of “financial implosion” has widespread applicability. Many places have already imploded and are being artificially inflated by the corrupt spending, borrowing and money printing policies in Washington DC.

The overwhelming financial problem in all government fiscal activities is the rising proportion of personnel costs as a percent of total revenues. There are absolute limits to how much government entities can tax. There must be statutory limits to how much they spend and the commitments they make to funding employee costs, benefits, pensions and support activities. Government budgets are overwhelmed by personnel costs for wages, benefits and pensions that now consume revenues needed for infrastructure (roads, bridges, tunnels, school repairs and constructions) and other necessities such as public transportation, health care, social services and other goods and services that can and should be purchased through competitive bids from private concerns. Public employment is at record levels indicating a massive anomaly to the productivity and efficiencies that are realized in the private sector. State and local employment is a record high 19.7 million. Federal government employment is a record high 2.7 million. Over 22 million (a) people are on government payrolls!!!! The payroll costs for all these employees, coupled with the needed buildings, offices, desks, automobiles, trucks, uniforms, weapons, training sessions, conferences, computers, managerial staff, vacations, health insurance and massive pension program benefits is overwhelming limited tax revenue sources at the very time the private sector is cutting back to realize increased productivity and efficiency. This situation cannot be cured through curtailment. It requires drastic cutbacks, drastic permanent layoffs and drastic changes to benefit and pension program terms and funding. It must start in November 2010.

(a) Interested readers can go to http://www.census.gov/govs/apes/index.html and examine the details of these numbers including state specific statistics.

Friday, October 23, 2009

Fiscal Policy

Americans have witnessed exaggerated unintended consequences of fiscal policy and monetary policy gone berserk. Terrified of an economic correction in 2001 and a stock market correction, the economic masterminds of the universe deemed that a combination of increased government spending and lower taxes (fiscal policy) and ridiculously low short interest rates (monetary policy) would be appropriate government policy to avoid some small pain brought about these needed economic adjustments.


The result of these three acts – massive federal spending (joined freely and aggressively by most of the 50 states), lower marginal tax rates and short term borrowing rates coupled with a discipline-free credit evaluation process have now produced record levels of bad real and contingent assets – loans, bonds and future payment commitments for entitlement programs and public sector employees benefits and pensions, at levels that may not even be quantifiable. This process and its results have birthed their own bogeymen. The blame game identifies the bad guys as Wall Street greed merchants, sleepy regulatory agencies and, depending upon the issue and the proclaimer, insurance companies and other capitalist entities. The real bogeymen are 2.7 million federal employees; view them for yourselves at: http://www2.census.gov/govs/apes/07fedfun.pdf  and over 19 million state and local government employees – view them at: http://www2.census.gov/govs/apes/08stlus.txt . These numbers are truly numbing!

American fiscal policy is a complete failure. Everyone seems to know but the DC fools.  Moderate economic corrections are deemed to be politically unacceptable. This is absolute nonsense. What should be unacceptable is the dominance of special interests which prevent weak and corrupt politicians from cutting back on government spending when tax revenues encounter shrinkage due to economic slowdown or recession. These politicians are akin to a person not cutting back on caloric intake after an undisciplined holiday period with excessive eating and drinking. Look around you. Have you ever seen so many obese people? This mentality of no personal or communal discipline is now the norm in the US.

Special interests are so imbedded in America’s political power process that politicians think that saving a government job is a benefit to overall economic growth. It is exactly the opposite. The more government jobs that are funded the fewer wealth creating jobs will be formed. It is as simple as the logic of the fat person. Tomorrow things will be better. Nonsense. Tomorrow starts today and if you don’t cut back today you will never experience a better tomorrow. Sacrifice and frugality are fundamentals everywhere but in the fiscal and monetary policy of Washington DC and state capitols. And, an increasing plurality of American voters is buying into this fiscal policy nonsense!

Wednesday, October 21, 2009

We Try Harder

Who is the biggest spending special interest group in the US of A?

US Chamber of Commerce. Here’s how they describe themselves at http://www.uschamber.com/

“The U.S. Chamber of Commerce is the world's largest business federation representing 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. More than 96% of U.S. Chamber members are small businesses with 100 employees or fewer.”

So, who’s number 2? American Medical Association. Check them out at: http://www.ama-assn.org/

Here’s how they describe their mission: “Mission: To promote the art and science of medicine and the betterment of public health.”

TheFundamentals is a big fan of doctors, particularly doctors who are bettering public health and the art and science of medicine. But, what about doctors who are bettering their own financial health? Where in the mission statement do they address “bettering our doctors financial health?” Let’s see if the AMA needs to revise their mission statement.

The AMA recently sent their boss, J. James Rohack, M.D. to Washington DC to support Senate Bill S. 1776 “to repeal the flawed Medicare payment formula.” So, Dr. Jim aligned himself and his big organization with one of the real successful powerhouses of the US Senate. He chose a senator who has been chosen by the people of one of the states with the highest unemployment in the US; one of the most troubled large cities in the US; a state that has become the poster child for begging for federal handouts; a state that avoids bankruptcy or receivership as the consequence of the 24/7 operations of the printing presses at the US Bureau of Engraving and its codependents at the US Treasury and Federal Reserve.

Why, on earth, one might ask would the head of the American Medical Association, a fairly prestigious outfit, align with a person with these credentials? What could possibly motivate such a partnership?

You get three guesses.

One. Promote the art of science and medicine? NO.

Two. Promote the betterment of public health? NO.

Three. Promote our members financial health? YES.

The estimated cost of S. 1776, that great piece of legislation being promoted by the senator from the state of Michigan and Dr. Jim is a modest ----- $247 BILLION over the next 10 years!! That should keep the fuel tanks on the yachts of a few hundred thousand physicians pretty much filled up. Or, if you prefer to stay on land, it should pay the dues at the prestigious country clubs, huh?

Also, in case you are interested. The AMA was joined in supporting this recently renamed piece of legislation - Doctors Financial Health Security Act of 2009, by that ever so present special interest group know as AARP. This outfit claims a modest 40,000,000 members. One thing you can always count on is the early bird specialists lining up for something else to put on their children and grandkids credit card. You just gotta love this combination: Senator from a completely busted state; head of an organization of pretty rich individuals and 40 million insatiably demanding wannabee antediluvians all groveling for another big payday for their members. You scratch my back; I’ll scratch yours.

The AMA. We try harder.

Monday, October 19, 2009

"kool aid"

“And good teachers aren't just critical for the success of our students. They are the key to the success of our economy.”

“And we need to treat teachers like the professionals they are by providing good salaries and high-quality professional development opportunities.”

“And we need government to support significant efforts to recruit and retain teachers and to reward high-performing teachers.”

Compelling arguments, huh?

Who do you think is the source* of these quotes? Mission statement of the American Federation of Teachers (1,400,000 members)? The National Education Association (3,200,000 members)?

Is there validity to these quotations? Teachers must be critical to the success of students? Teachers should be treated as professionals? And, government needs to support efforts to recruit and train teachers? Well, the first two are pretty basic but the third makes it seem as if the others are just designed to reach the conclusion and the conclusion is “we need government.”

But let’s go back to the first quote. “They are the key to the success of our economy.” True or False? Answer here: _____

If you say True you will buy into the rest of the posits and accept the conclusion (kool-aid) and the rest falls into place.

If you say False the whole argument collapses.

So, true or false?

Unfortunately the answer is false. The argument is quite convincing because it sounds good (kool aid) and if you accept it you will miss the key element that is missing from the conclusion. Third quote says, “…reward high-performing teachers.” Nothing about penalty for “low-performing teachers.” Nothing about low-performing teachers at all. Why not?

The entire argument collapses because it is a political statement, not an argument basic on fact and logic. It collapses because it is designed to communicate a message and sell an emotional position. TheFundamentals calls this “drinking the kool aid." Without rewards and penalties the economy will not be competitive. Without a constant focus on competition and competitiveness there will be no economic success.

Where do people develop competition and competitiveness? Lots of places. In the home, on the sports field, in the ‘hood, in good schools and in the military. Yes. In government? Absolutely not.

Competitiveness is not only a fundamental; it’s a fundamental most are born with. It is the key to economic success. GM and Chrysler are not in the dumpster just due to their high legacy costs and ridiculous union rules. They lost their competitiveness. Government bailed them out because they were not competitive. Government supports high legacy costs and ridiculous union rules and benefits which are non competitive (see: TheFundamentals, October 15, 2009). So, does the source of the above quotes.

People who sell kool aid do so for their own benefit. People drink kool aid because their emotions dominate their fundamentals. Stick with TheFundamentals.  Don't drink the "kool aid."

*Michelle Obama: US News and World Report, October 15, 2009

Thursday, October 15, 2009

Government to Government: STOP

There is a village about 30 miles northwest of Chicago that is communicating a warning and call to action about the problem with public employee pensions in Illinois. This village in this state is one of thousands of local communities across the country (view the links in the left margin entitled “Feeding at the Public Trough”) facing unheard of costs for pensions that have been manipulated through state legislatures at the behest of special interest unions with the complicity of weak and corrupt politicians. This is a very important message and we encourage you to read it in its entirety.   Here is the text of that call to action:

Q: What pensions are available to public employees?

As required by state law, municipal employees (police,
fire and non-public safety personnel) are covered by three
separate pension programs.

Police and firefighters are covered by local pension funds.
Decisions for these pension funds are made by a board
consisting of two active employees, one annuitant and
only two representatives of the municipality. Police and
firefighters receive a full pension (75% of their final pay)
after age 50 with 30 years of service and may receive a
50% pension at age 50 with 20 years of service. Police and
firefighters also are entitled to numerous other benefits.
All other eligible municipal employees are covered by
the Illinois Municipal Retirement Fund (IMRF), which is
a statewide program that consolidates multiple municipal
employers into a single fund. It is governed by a board
consisting of three current employees, one annuitant and
four representatives of employer local governments. IMRF
employees receive a full (75%) pension at age 60 after 40
years of service and may receive a 50% pension at age 55
with 31 years of service.

Q: Who determines the benefits and contributions for
pension programs?

By law, our Village is mandated to fund the pension benefits
of police, firefighters and other municipal employees. The
General Assembly determines the benefits and employee
contributions for pension programs, not your local elected
officials.

The Crisis:

The unprecedented economic downturn has impacted our
residents, businesses and municipal revenues. Despite the
fact that the Village of Barrington has made its actuarially
required pension contributions (and more) over the years,
losses in retirement fund values and escalating costs due
to pension sweeteners authorized by the Illinois General
Assembly have taken a toll on the funding of public
employee pensions. This funding comes from three
sources – employee contributions, employer contributions,
and investment returns. Since employee contributions are
capped by the General Assembly, the fiscal burden falls
upon the Village contributions (local taxpayers) to keep
these funds financially solvent. By law, Barrington is
mandated to fund the pension benefits of police, firefighters
and other municipal employees.

Unless the Illinois General Assembly takes action on October
14-16 and 28-30, a massive spike in police and fire pension
costs will have a significant impact on our Village’s budget in
2010. Funding these increased pension costs will contribute
to major cuts in other areas of our budget affecting Village
services and possibly more staff.

Recognizing the financial impact on taxpayers, the Illinois
Municipal Retirement Fund (IMRF) board took steps
to mitigate its investment loss and offered an option to
municipalities to cap their fund contribution for municipal
(except police and fire) employees to a 10% increase per
year. However, a similar cap on contributions to police
and firefighter funds will require legislative action by the
Illinois General Assembly. While a cap is only a stop gap
measure, it would help ease the immediate budget crisis for
municipalities.

Our community, through the Northwest Municipal
Conference (NWMC), sought such a legislative remedy this
year. Working with Senators Susan Garrett and Pam Althoff,
NWMC succeeded in getting Senate Bill 2011 approved by
the Illinois Senate. Opposition from the state police and
firefighter unions stalled Senate Bill 2011’s advancement in
the Illinois House.

Members of the General Assembly have one more opportunity
to provide relief from this substantial spike in public safety
pension costs during their fall veto session on October 14-16
and 28-30. Waiting until next year for legislative action will
be too late.

While the state Representatives and Senators representing
Barrington have been very helpful to our Village on this
issue, it is important for more of their colleagues to do the
same. To minimize the impact on current Village services
caused by escalating pension costs, please contact your State
Senators and Representatives, thank them for their past
support, and urge them to continue to support Senate Bill
2011 and ask them to encourage their colleagues to support
it, as well.

For a list of the Village’s State Senators and Representatives
and for additional information, please visit the Village’s
website at  http://www.barrington-il.gov/.

Tuesday, October 13, 2009

Fresh Air

It would be interesting if it were possible to have an objective historian comment on today’s American scene but with the perspective of the reality of the next 20 years. We all must wonder how the gap between the power forces can be so great. How can the party in power (PIP) be preaching a gospel of big government spending, massive deficits and debt accumulation and still claim the target of creating jobs? While the party out of power (POOP) preaches tax reductions and spending limitations to create jobs. It is like two coaches, one telling the players that defense wins ball games and the other emphasizing offense. Both POOP and PIP can lay claim to massive spending and massive debt buildup. They are good at that. They always seem to come together frequently enough to make sure there are enough votes to pass any and all spending bills. So, what is a person to do? One says tomato and one says tomahto.

Let’s leave the politician scene and look for input elsewhere. This, by the way, is not a path frequented by the so-called mainstream media. For years, TheFundamentals has wondered why TV executives and producers keep bringing the same faces and voices to the same talking shows with the same limited vision, parochial viewpoints. Why do they keep giving the diminishing viewing and listening audience the same faces, the same opinions, the same fact less viewpoints? If their audience were growing one could explain this repeat performance. It is similar to the correct criticism leveled to the old boys club that runs many big corporations although that scene is and has been changing. The media folk just don’t get it. But then something happened on this last Sunday when one of the shows actually had a real life businessman and he acted like a real life businessman. All of us who made a living in a competitive environment where you had to make sure there was enough money in the bank so that the employees could cash their paychecks and you had to take phone calls from clients who were not as impressed with the quality of your product and services as you were and all of us who made calls on prospects and sat in a waiting room for 52 minutes waiting to get 10 minutes of some middle managers time to make a pitch had to smile when Steve Wynn uttered the following words, “Government has never increased the standard of living of one single human being in civilization's history."

Praise the Lord. There still is at least one common sense guy left in the purgatory we call American politics.

Let’s just hope that this one voice is heard somewhere before it is too late. Wynn’s sixteen words should be tattooed on the buttocks of every PIP and POOP politician.

Let’s just hope that the voters on November 2, 2010 (not that far away folks) come to their senses in adequate numbers to put an end to this trip through the rabbit hole. As TheFundamentals has pointed out, there are an awful lot of voters who sign on to the “something for nothing” philosophy. Wynn has it right. Government has not and cannot create wealth. It cannot create jobs. It can only foster a growth environment or destroy a growth environment. Simple reality. Guess which path POOP is on?

The US of A needs a few Steve Wynn’s on the November 2010 ballots. Pray and work for this event.

Monday, October 12, 2009

M Y O B

“He got a sweet gift of gab, he got a harmonious tongue,
He knows every song of love that ever has been sung.
Good intentions can be evil,
Both hands can be full of grease.
You know that sometimes Satan comes as a man of peace.”
Man of Peace. RDylan, 1983


There is something very strange going on. Reasonable and credible behaviors have been abandoned. Common sense departed some time ago. But there is even something a bit more insidious in the works.

Eight years ago 19 or 20 young Muslim men, bent on making quite the statement to the world, commandeered four domestic airline flights and headed to predetermined targets. They were very successful. But we have made them successful beyond their wildest fundamentalist dreams. We are in the process of bankrupting our nation as a consequence of their dirty deeds and our lack of discipline. The latter is our doing; not theirs.

A new president, clearly shocked to his core by their acts and surrounded with older fellows who seemingly were just waiting for a reason and a cause, unleashed the military on several targets at what now can only be deemed to be an unneeded cost in strong young American lives and without regard to any cost/benefits/necessity/reasonable expectation analysis.

Even worse in dollar cost, the bureaucracies with their special self serving agendas rallied the legislatures in Washington and their state capitols to spend money no one had on many unneeded projects, bureaucracies and safeguards. The result is that one cannot enter a public building unimpeded or a stadium without rules, process and screening. Airports have become exaggerated shakedowns and exercises in intimidation for normal folk while politicians, bureaucrats and the well-to-do fly out of private terminals. Any and everywhere a taxpaying citizen looks, there are police cars with shaded, closed windows occupied by gun carrying bureaucrats dressed in swat outfits and other para military attire that is reminiscent of Star War storm troopers. It is every law abiding citizen’s nightmare of a police state gone wild. Americans are now subject to more police agencies, more cameras, more restrictions on their movements, more electronic invasion of privacy, more trumped up press conferences of plots thwarted and more intimidation and hassle than any developed country in the world. American children cannot be children without facing zero tolerance policies that would shame the Soviet nomenklatura.  Why?  Why do these people always pick on the easiest targets, the law abiders, the meek?  Are they so insecure that they need the illusory feedback of intimidating the complicit?  Or do they just like the power, the pay and the pensions?

Now others from afar with their agendas send messages and honorariums to an unproven, untested and unaccomplished president? What message is behind their entreaties and awards? Don't follow the military? Follow the beliefs of some Norwegian legislators? Turn our affairs over to world bodies? Retreat? It may be good time for America to take a self imposed “time out.” Our efforts to solve others problems are proven unproductive and replete with unintended consequences.

We are a country of exceptional but brief history and wisdom. We are most certainly capable of finding trusted allies and capable of correcting our sins and errors. There are fundamentals we can trust. It is time to tell others to mind their business and time for us to get about minding ours.

Friday, October 9, 2009

Where is Paul Volcker?

Mr. Obama’s economic team consists mostly of recycled agents and bureaucrats from the last 20 years.

Ben Bernanke is the key guy. He’s supposed to be independent. He has been on the Board of Governors of the Federal Reserve System since 2002 except for a brief stay as Chairman of the President’s Council of Economic Advisors in 2005. He is now numero uno at the Fed even though his fingerprints are on most every bad decision (they are legion) that the Fed and their foolish previous chairman (remember the Maestro?) of so many years made. Ben is an academic; no real life experience in a competitive market environment.

Larry Summers was a staffer for the above council in the early 80’s and he also advised the Dukakis presidential campaign in the late 80’s. How’s that for a primo reference? He’s been at the Treasury Department in several jobs including the top job and he actually was the president of Harvard for a while. To his credit, we surmise, he departed because of a no confidence vote from the faculty. He had the cojones to suggest, among other things, that faculty member Cornel West was a bit of a goldbricker. West split and so did Summers. He has knocked around in some Wall Street jobs; some say riding his resume and reputation for cleverness.

Peter Orszag is running the office of management and budget. He has had several Washington jobs and also worked at his consulting firm and one or two of those think tanks. Peter appears to be the designated optimist of the new administration. He has already had to revise some of his rosy estimates but TheFundamentals guesses that viewing the world through those rosy glasses may be part of his job description. He’s 40 years old. He joins Timothy Geithner (48 y.o.) as having no real competitive experience. They are politicians and can’t wait to put out press releases proclaiming some terrific results from some government bailout/stimulus program. Two vital jobs. Budget is about spending money; Treasury is financing.  These guys are trying to look good for the boss. Ask them about risk taking, meeting a payroll and competing for business.

Paul Volker joined the Fed in the 50’s and worked there for a while and also worked in the banking business. He also worked at Treasury and spent time as an academic. He made his bones in the early 80’s as chairman of the Fed. Inflation was awful. The great JCarter, president and now blanket racist name caller, was befuddled. Volker came along and raised interest rates until inflation was defeated. Not popular. He was independent. He was strong. He ignored the politicians. He got the job done. He is a grown up among children. He is the one eyed man in the land of the blind. He has significant Wall Street experience. TheFundamentals doesn’t know where he comes down on the issues of DEFICITS = DEBT = DESTRUCTION. We just know he had the cojones to right the ship when it was badly off course 30 years ago. Paul, “Are you OK with the course we are on now?  With the direction the above gang is leading us?” You like this “Win with inflation” program?   Hello. Paul, ‘Where are you?”

Wednesday, October 7, 2009

Borrowing Capacity

How much money can the US and the states borrow? There is an upper limit to borrowing capacity. Should we set our limits or just try and find them and hope for the best? What can taxpaying American citizens do to stop the rush to test these limits? Why isn’t our focus on setting limits on our debt and borrowing rather than adding to debt and hoping that we can keep doing so without more calamities?

TheFundamentals has addressed the concept of limits before (see August 3 and 5, 2009.) Limits imposed externally or ex post facto are akin to jail sentences. They come along too late because the damage has been done. Why can’t America impose self control on its addiction to debt? Is this topic worth discussing?

Have you heard a discussion about debt limits? What did the presidential candidates say during the debates about debt limits? What do the platforms of the two political parties say about this issue?

You may visit the Democratic Party Platform at http://www.democrats.org/a/party/platform.html

Go to page 27 to the paragraph entitled “Fiscal Responsibility.” Read it. They blame the prior administration for running up the debt to “over $4 trillion.” Then they spend the rest of the document on their massive spending programs. No challenge to either stop, manage or reduce the debt. The debt number they use vastly understates the US debt. They make no reference to the need to stop adding debt. They clearly do not see debt as a problem. Let’s just repeat that simple fact. THE PARTY IN POWER NEITHER RECOGNIZES THE US DEBT AS A PROBLEM NOR EXPRESSES ANY NEED TO CONTROL SPENDING IN ORDER TO STEM THE RISE IN THE US DEBT. INSTEAD THEY UNDERSTATE THE ACTUAL (see left margin) DEBT.

You may visit the Republican Party Platform at http://www.gop.com/2008Platform/Economy.htm

They have two headings that may be pertinent: Economy and Government Reform. We went to “Economy” first. NOTHING. NOT ONE MENTION OF THE US DEBT. So, next, we went to “Government Reform.” They talk about the spending in excess of tax receipts and the budget process that just keeps on spending and spending without cuts, oversight or review. NOTHING ABOUT THE DEBT PROBLEM. NOTHING ABOUT FIXING THE PROBLEM OR PAYING THE DEBT DOWN.

The party in power (PIP) and the party out of power (POOP) do not create wealth. They do not (and cannot) create jobs or growth.  They have the power to tax and spend but they do not create wealth, jobs and economic growth. They tax it. They tax wealth, payrolls and any and all forms of economic activity. They tax earnings when the income is earned and they tax expenditures when the income is spent. They charge fees to get to work, to fill up the tank with gas, to use the telephone when you try to find a job and they tax the price of the nice clothes you buy to make a good impression on your job interview. They tax the home you live in, the food you eat and the drugs you need to get better. So, if you work, eat, are sheltered, clothe yourself and/or try to get better when you’re sick they get a piece of it. Yet it is still not enough. So they borrow and create debt. And, their appetite for a piece of your income and spending and debt on top of those funds is insatiable. Only you can stop it. THEY DO NOT EVEN RECOGNIZE IT AS A PROBLEM!

The people who are responsible for the financial strength and fiscal responsibility of the US of A have neither the knowledge, experience nor skills to do the jobs they occupy. We must insist that they stop accumulating debt and repay the debt that exists. Self imposed limits on debt are a fundamental.  No one can borrow endlessly.

Friday, October 2, 2009

Sacrifice - Defined Benefit Pension Plans

In the last 50 years the US of A has departed from the fundamentals of financial soundness and fiscal restraint with a devastating effect upon our wealth creation ability which leads to a lack of competitiveness which leads to a loss of good jobs and very poor economic growth. The solution to this malaise is not all that bad. If you have been following TheFundamentals you know that correction will come through frugality and sacrifice.

Lo and behold, someone spoke about “sacrifice” yesterday. Let’s follow up on the theme.

Mrs. Obama brought up the concept of “sacrifice” in relation to the efforts she and her husband and Oprah (the big o) are making to seal the deal with bringing the 2016 Olympics to Chicago. This scheme is indeed quite the teachable moment but we will only focus on “sacrifice” today and what real sacrifice would look like as part of correcting the American malaise. By the way, Mrs. Obama says that she and others are making their sacrifices because “funds are drying up” and our kids need to “engage in sports and learn how to swim and ride a bike.” We’re beginning to see why this gal got the big bucks working at a hospital.

Let’s use this moment to look at an opportunity for the Obama’s to lead in an arena where they have great familiarity – public sector employees (PSE’s) and their unions. Most all of these PSE’s participate in what are known as defined benefit pension plans (DBPP.) DBPP’s are the old fashioned plans wherein the PSE is guaranteed a specific defined payment upon meeting the requirements for retirement. In many cases these requirements are very generous (early retirement at a young age, big annual cost of living increases, minimal number of years of service to qualify, etc.) and therefore very costly to the employer. The employer in all these cases, be it a local, state or federal government, is us, the taxpayer. In a recent article, the Chicago Sun Times (a), one of Mr. Obama’s home town newspapers, pointed out that the cost to the taxpayers of Illinois for pension payments to PSE’s was $800 million per month! That means almost $10 billion per year in a state with an annual budget of $34 billion. http://www.state.il.us/budget/FY2010/FY2010_Budget_Briefing.pdf

So, what needs to be done? Get rid of defined benefit pension plans as soon as possible and replace them with defined contribution plans (IRA’s and 401k’s) just as has been done in the private sector which is the wealth creating area and the source of tax receipts. This change has to be priority number one in America. It is just that important!

Mr. Obama can lead and introduce the legislation at the federal level to immediately shut down the existing federal DBPP’s, have the actuaries calculate the reduced payments due employees at qualifying retirement dates and then introduce defined contribution plans (DCP) with a small, limited employer annual contribution of 2 or 3% of annual salary up to a certain dollar limit.

What about states and local governments you say? Well, the folks in Washington have figured out how to get states and local governments to go along with their plans. They frequently pass legislation that provides states with funding for certain programs if the state “voluntarily” goes along with one of those “do this” or “don’t do that” requirements. This way you can get around Article 1, Section 8 and the tenth amendment to the USConstitution. So, in the future, every time you pass legislation with federal funds going to the states, require that the funds only go to states that have done away with DBPP’s and have actually replaced them with DCP’s.

Some small sacrifices will produce major benefit to the competitiveness of the US and the children of the US will be the beneficiaries of this change. Perhaps the Obama’s can introduce this change on “the big o’s” show and have the mayor of Chicago, that great leader, start with his own home town.

(a) TheFundamentals has previously highlighted this series of articles and we encourage our readers to support the Sun Times for this excellent journalism. It is an example of the revelations that come from good research and reporting. Start at http://www.suntimes.com/data/1764213,pensions-illinois-database.article and http://www.suntimes.com/news/politics/1764823,CST-EDT-pension11.article

Thursday, October 1, 2009

Inflation Addicts

The reeling US economy is the result of a large and ongoing reset of US residential real estate prices. What happened is that for 20+ years, the US government did everything possible to keep inflating the prices of US residential real estate. The congress supported lending to anyone with a pulse and financed much of it through two entities – FNMA and FHLMC with the implicit understanding that the credit of the US would backup their direct borrowings and their securitized packaged mortgage loans.

Everyone loved it. Builders, bankers, Wall Street, retailers and, most of all, taxing authorities at local, state and national levels. It was the garden party of all time bought and paid for by the US government. So, when the bubble burst the USTreasury and the Federal Reserve who both stood by silently as the bubble built (actually the Fed did its part by recently keeping interest rates so low that in effect a borrower was being paid to borrow versus the fundamental of having to pay for borrowing) stepped in with cash, more borrowings, printed currency and electronic currency to stand behind all the bad assets created in the process and even the so-called derivatives based on the bad assets. They had no choice. This debacle was made in the US of A and the fingerprints of several white house(s), congress(es) and so-called regulatory agencies were all over it. Everyone knows it. And the people with the bad paper now know that the US of A is quite capable of managing its economy with the same promiscuity that 3rd world countries (aka banana republics) have done for years.

That is why the US taxpayer is on the hook for all the bailouts. Your country created the mess and must fix it or it will be a long time a coming before anyone offers your country any more credit. That, folks, is what happens when politicians have access to the paper money machine of any country. Locate one politician, besides Ron Paul, who grasps much less will take responsibility for the mess.

So, what is happening now? The residential real estate bubble has burst. Things are getting better by the day. Right? Wrong. The US congress and its active enablers at the Federal Reserve and the USTreasury are supporting massive bubbles in health care services, government services and education services in the 50 states. These bubbles are ongoing inflation schemes that are every bit as attractive to the politicians and special interests as was the residential real estate bubble. The thinking now is that if the US government can keep the cash machine printing and the borrowing machine borrowing that these bubbles can be sustained. The hope is that this ongoing inflation scheme will settle down while other countries inflation machines will gradually catch up and then the US will not be hung out to dry again. Good luck. Just take another look at the recently displayed (see TheFundamentals, September 24, 2009) massively higher health care costs per capita in the US versus all the other developed countries. This is a bubble. What happens to bubbles?

This is the game being played. The stakes are very high. The politicians and special interests would not like to go through an adjustment period similar to the deflation of the residential real estate market. Can you imagine what happens if health care workers, education workers and government employees have to look for real jobs in wealth creating ventures? Inflation addiction. Where is the twelve step program for this ailment?

You live in a country addicted to the need for ever rising prices and tax revenues. Substitute “prices” for “account balances” and “tax revenues” for “investor’s cash” and it reminds one of BMadoff’s scheme. His scheme lasted for 20+ years too. His scheme failed when the flow of incoming money slowed and the requests for redemptions rose. Doesn’t take twelve steps in the real world; just two.