Curried Wealth Building
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March 18, 2012
Issue 190  -  Is There an Answer?
I've heard many in the media and various politicians discussing the "answer" to our financial and economic troubles.  They all seem to be quite confident that their solution would be just the ticket.  Let me break the news to you and them.....there is no answer.  No magic bullet.  No secret passage way out of the labyrinth.  We are left in a morass of our own making and there is no easy way to make the pain stay away.  It's coming.  The U.S. has dug such a deep hole and we continue to dig.  If you look at this chart you will see something quite disturbing:
In the understatement of the year, this chart calls us an outlier.  Ya think?  This is only going to get WORSE with Obama care.  To improve would have required a complete government takeover (bad idea) or a complete government exit from the area.  (not going to happen)  So this will continue to be a yoke around our necks pulling us under the water.
Of course this is the last thing that the economy needs when you combine the effects of this chart:
All time gas price highs is NOT what our consumer economy needs.  Don't worry though it is not affecting inflation:  (yeah, right) 

The Schrodinger Inflation: Ignore All Time High March Gas Prices, BLS Tells You Inflation Is Lower Than Expected

Inflation less than expected!  Hooray!  Does the government think anyone believes them anymore?  You'd have to be pretty dense to fall for this scam.  It seems that some inside the "game" can't take the lies anymore:

Terminated CBO Whistleblower Shares Her Full Story With Zero Hedge, Exposes Deep Conflicts At "Impartial" Budget Office

As we stated earlier, we will present any and every whistleblower's statement in its entirety, and without editing, and so we will, however we want to bring our readers' attention to several key aspects of Ms. Pham's termination from the CBO, because it may have substantial implications over the enacted $25 billion robosigning settlement. The reason for this is that Ms. Pham was fired because of her work voicing skepticism over precisely the same 'chain of title' validity issues that snarled foreclosure to a halt for much of 2011, which as Adam Levitin has said present a "potential systemic risk to the US economy" and which have necessitated the recently enacted Robosettlement to avoid massive losses for the banks (and in the process yet another shadow taxpayer bailout for the Too Big To Fail banks).

The bottom line is that the CBO was warned at least by Ms. Pham (and possibly others) over the dangers of precisely the issue that Attorneys General are scrambling to shove under the rug in exchange for a wristslap to all mortgage originators (i.e., the same banks that somehow are now getting bailed out by taxpayers and the GSEs on an annual basis). And just like every other issue that merely gets a cosmetic and very transitory liquidity facelift, nothing ever is actually fixed. As Ms. Pham says: "It is unclear how the recent State attorney generals’ agreement to a proposed yet unpublished terms of the $25 billion robo-signing settlement would repair the chain of title issues that continue to mutate. In January 2011, the Massachusetts Supreme Judicial Court reversed the foreclosure actions of two banks for lacking proof of clear title, followed by a decision in October 2011 that a buyer who purchased a house that was improperly foreclosed upon does not make the buyer the new owner of the house; the sale does not transfer the property."

While we are confident that even more contract laws will be terminally bent and broken simply to avoid some more balance sheet impairments for America's already insolvent financial system, the message here is clear: the CBO, and arguably other "impartial" policy advisors, will only focus on the established institutional opinion, preferably that set by Wall Street itself, and retaliate (in some cases with physical force) over anyone who provides a dissenting opinion.

Such as Ms. Pham.

We are told time and time again how "imparital" the CBO is with their calculations and yet here we find an insider relating how she was dissuaded from any bad intrepretations of data.  In fact it seems like Wall Street may have a rather large influence on our "unbiased congressional budget office." 
Anyone who thinks that money interests don't run the whole show are just misinformed.  Financial concerns affect everything.  This is just the way things are and will remain until we have system reset.  There are conditions which are pushing us toward that outcome.
In our economy, which is driven by consumerism, the largest asset for most people is their home.  If someone is having an issue with their home, it puts a strain on their spending.  Let's look at the condition of that area.  In this chart you see the percentage of seriously delinquent mortgage holders by state:
That is not a healthy chart.  If there are more than 7% of morgage holders in dange of defaulting in 11 states, that is quite alarming.  Only 6 states have less than 4% delinquent, which is a "normal" percentage over history.  In case you don't think 1% is much, keep in mind that that there are around 46 million mortgages.  This mean each percent is 460,000 homes.  If half of these were to be foreclosed on, that would mean over 1.5 million more homes "for sale."  More inventory is something we definitely do not need.  It's not surprising that so many are hurting as debt levels are still skyrocketing:
This will be impossible to deal with in a normal manner as I have written about almost to excess, but there are some who claim that we can "get this under control."  Is that true?  No, as this excerpt from a larger report points out:
  • The necessary deleveraging would lead to a period of low growth, which could, given historical precedent, last more than a decade and would be amplified by the aging of Western societies.
  • This would have consequences for the emerging markets, with their exportbased growth strategies. Any shift toward more consumption in these countries might not have a substantial stimulatory effect on the economies of the West.
  • Efforts by governments to deal with their debt problems would lead to even lower growth and would increase the risk of social unrest. A recent study shows that as soon as expenditure cuts exceed 3 percent of GDP, the frequency of protests increases significantly. The demonstrations that occurred in some European countries this September should therefore not have come as a surprise.
  • Banks do not have enough equity to weather further write-downs—and governments are running out of ammunition to stabilize banks should a new crisis hit.
  • Central banks may be seen as the last remaining institutions able to stabilize the financial markets and support economic growth. But their efforts are losing effectiveness. In spite of increasing balance sheets by up to 200 percent since the end of 2007, central banks have been unable to ignite sustainable economic growth.2 On the other hand, the monetary overhang could be the basis for significant inflation.
  • The longer governments postpone addressing the fundamental problems of the crisis, the deeper and more prolonged the crisis will become.
So no, there is no way to just grow out of this.  Add in many, many promises, which are CERTAIN to be broken, and it only gets worse:

Broken Promises: Pensions All Over America Are Being Savagely Cut Or Are Vanishing Completely

How would you feel if you worked for a state or local government for 20 or 30 years only to have your pension slashed dramatically or taken away entirely? Well, this exact scenario is playing out from coast to coast and in the years ahead millions of elderly Americans are going to be affected by broken promises and vanishing pensions. In the old days, things were much different. You would get hired by a big company or a government institution and you knew that the retirement benefits that they were promising you would be there when you retired in a few decades. Unfortunately, we have now arrived at a time when government institutions and big companies have promised far more than they are able to deliver, and "pension reform" has become one of the hot button issues all over the nation. Many Americans that have been basing their financial futures on their pensions are waking up one day and finding that their pensions are either gone or have been cut back dramatically. According to Northwestern University Professor John Rauh, the latest estimate of the total amount of unfunded pension and healthcare obligations for state and local governments across the United States is 4.4 trillion dollars. America is continually becoming a poorer nation and all of that money is simply not going to magically materialize somehow. So where is that 4.4 trillion dollars going to come from? Well, either pension benefits are going to have to be cut a lot more all over America or taxes will need to be raised dramatically. Either way, we are all going to feel the pain of these broken promises.

There simply is not enough money out there to keep all of the pension commitments that have been made. Something has got to give. In the end, millions of elderly Americans will likely be plunged into poverty as pensions disappear.

Some local governments around the nation are already declaring bankruptcy and are either eliminating pensions or are cutting them very deeply. Just check out what just happened in Central Falls, Rhode Island....

For years, city officials promised robust union contracts and pensions without raising revenue to pay for them. Last August, the math caught up with them. Central Falls was broke, its pension fund short $46 million. It declared bankruptcy.

"My daughters grew up here, went to school here. It's all gone," said Mike Geoffroy, a retired firefighter.

He said he could not make the payments on his house after his pension was cut by $1,100 a month.

When will the math catch up with the city where you are living?

For years and years most of our state and local politicians have been ignoring this problem. But eventually a day comes when you simply cannot ignore it any longer.

Check out what Pensacola Mayor Ashton Hayward said about the situation in his city recently....

"When our annual pension liability is more than our yearly property tax revenues, we have to do something"

Keep in mind that taxpayers don't get any new services for money spent on pensions. It is money that goes straight into the pockets of retired workers. State and local governments are desperately trying to pay retired workers what they are owed and fund ongoing government functions at the same time, but many have reached the breaking point.

All over the country, state and local governments are going broke. The following is from a recent article by Duff McDonald....

Alabama's Jefferson County has actually gone bankrupt. Stockton, California is all but ready to do the same. And all you have to do is look to Detroit—or any of the nearby auto towns named after a Buick model of one sort or another—and you see fiscal crisis playing out right now. Look in your own backyard—or at the potholes on your neighborhood roads—and you will likely find the same.

Things are so bad in Stockton, California that they are actually skipping debt payments....

The city of 290,000 that rode the wave of the housing boom in the late 1990s and early 2000s now finds itself littered with foreclosed homes, saddled with pension, health care and other obligations it can't afford, and unable to pay its bills.

The City Council voted last month to suspend $2 million in bond payments and begin negotiations with bond holders, creditors and unions.

And did you notice what is being blamed for the financial problems in Stockton?

Pension and healthcare benefits.

Sadly, we are seeing pension nightmares erupt all over the nation right now.

For example, check out what is happening to the Public School Employees' Retirement System and State Employees' Retirement System in Pennsylvania....

PSERS had an accrued unfunded liability of nearly $26.5 billion, the amount of money the fund is short to cover existing retirement benefits. That hole is expected to grow to $43 billion by 2019. SERS is $12.5 billion in the red, and that shortfall is expected to climb to nearly $18 billion by 2018. Unless the stock market makes giant sustained gains, taxpayers will have to refill those funds.

That doesn't sound good at all.

In California, the Orange County Employees Retirement System is estimated to have a 10 billion dollar unfunded pension liability.

How in the world can a single county be facing a 10 billion dollar hole?

This is madness.

The state of Illinois is facing an unfunded pension liability of more than 77 billion dollars. Considering the fact that the state of Illinois is flat broke and on the verge of default, it is inevitable that a lot of those pension obligations will never be paid.

In fact, there are going to be a whole lot of broken promises all over the country.

Pension consultant Girard Miller told California's Little Hoover Commission that state and local government bodies in the state of California have $325 billion in combined unfunded pension liabilities.

That comes to about $22,000 for every single working adult in the state of California.

So where is all of that money going to come from?

But at least most state and local government employees are still covered by pension plans, even if they are failing.

In the private sector, pension plans are vanishing at lightning speed.

According to the Boston College Center for Retirement Research, the percentage of workers in America covered by a traditional pension plan fell from 62 percent in 1983 to 17 percent in 2007.

That isn't just a trend.

That is a tidal wave.

And many of the private pension plans that still exist are massively underfunded. For example, Verizon's pension plan is underfunded by 3.4 billion dollars.

So what should Americans do in light of all this?

Well, the number one thing to realize is that the pension plan you have been counting on could disappear at any time.

We live in an economic environment that is extremely unstable, and about the only thing you can count on in this environment is rapid and dramatic change.

Do not plan your financial future around a pension plan. If you do, you are likely to be bitterly disappointed.

Americans that plan to retire in the coming years should do their best to try to fund their own retirements.

Unfortunately, most Americans are not putting away much of anything for retirement. As I have written about previously, one study found that American workers are $6.6 trillion short of what they need to retire comfortably.


Over the next 20 years approximately 10,000 Baby Boomers will be retiring every single day.

A lot of them are going to be blindsided by empty pension funds and broken promises.

We are facing a retirement crisis of unprecedented magnitude, and there is not much hope in sight.

And if there is a maor stock market crash, things are going to be much, much worse.

Most pension funds and retirement plans are heavily invested in the stock market. If we were to see a major financial crisis like we saw back in 2008 it would be absolutely devastating. Millions of Americans could see their retirement plans wiped out in short order.

Once again, please do not place your faith in the system.

If you do, you are likely to end up holding a bag of broken promises.

A gigantic tsunami of unfunded pension obligations is coming. A lot of state and local governments are going to go broke. A lot of promises are going to be broken.

If you hope to retire any time soon, you better plan on being able to take care of yourself.
There are many, many people who are counting on these pensions and have virtually no idea how unlikely it is that these payments will be made.  Most follow the "see no evil," approach and are hoping for the best.  The best won't be what they think.  There is no money to make good on these promises without massive inflation.  That is why massive inflation will happen.  Bank on it. 
Speaking of banks, the large BIS is acting like they think inflation is coming:

The Bank for International Settlements, which acts on behalf of central banks, has been buying significant quantities of gold on the international market amid falling prices, traders said.


According to several estimates, the BIS bought 4-6 tonnes of gold, worth roughly $250m-$300m at current prices, in the over-the-counter physical market last week, with purchases particularly strong at the end of the week. The total purchases over the past three or four weeks were likely to be as much as double that, the traders added.


In a note to clients this week, Credit Suisse referred to “aggressive central bank buying seen last Friday”.

Of course, central banks are well aware what they are doing. In fact, they have been buying up gold pretty much non-stop in the past few years.

As a group, they made their largest purchases of gold in more than four decades last year, led by emerging economies such as Mexico, Russia and South Korea intent on diversifying their dollar-heavy foreign exchange reserves. The World Gold Council has also pointed to the possibility of significant unreported purchases by China at the end of last year.


At the same time, European central banks have all but halted a run of large sales.


“Central banks have definitely been looking at gold as an asset class much more closely ever since European central banks stopped selling,” a senior gold banker said. “There has been a huge interest."


While some countries, such as Russia, China or the Philippines, have traditionally accumulated gold produced by their domestic mining industry, others use the BIS as an agent to carry out purchases and sales on their behalf, preserving anonymity.


The central bank buying comes as gold prices have slid in the past three weeks as strong economic data from the US has lowered investors’ expectations of quantitative easing by the Federal Reserve and made other investments, such as equities, appear more attractive.

I'm with the BIS here, buying gold and silver.  These are your safest bets to make it through the chaos.  In case you are unsure what gold is or you have trouble convincing others why it's important to buy it, here is a great explanation by Dylan Grice:  (zerohedge)

Grice "explains" what gold is:

It’s a lump of metal with no cash flows and no earnings power. In a very real sense it's not intrinsically worth anything. If you buy it, you're forgoing dividend or interest income and the gradual accumulation over time of intrinsic value since a lump of cold, industrially useless metal can offer none of these things. That forgone accumulation of wealth is like the insurance premium paid for a policy which will pay out in the event of an extreme inflation event.


Is there anything else which will do that? Some argue that equities hedge against inflation because they are a claim on real assets, but most of the great bear market troughs of the 20th century occurred during inflationary periods. A more obvious inflation hedge is inflation linked bonds, but governments can default on these too. More exotic insurance products like sovereign CDSs, inflation caps, long-dated swaptions or upside yield curve volatility all have their intuitive merits. But they all come with counterparty risk. Physical gold doesn’t. Indeed, during the “6000 year gold bubble” no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to.

And there you have it: no counterparty risk. Remember that the next time you look at a chart showing the $700 trillion ($1.3 quadrillion pre-revision) in total OTC derivatives, whose systemic disintegration is only a matter of time as actual cash flow, money good producing assets age, are confiscated and disappear. Oh yes, there is a reason why Bavaria Sachs is after the 107 tons of Greek gold...

Why does Grice own gold?

The reason I own gold is because I'm worried about the long-term solvency of developed market governments. I know that Milton Friedman popularised the idea that inflation is “always and everywhere a monetary phenomenon” but if you look back through time at inflationary crises – from ancient Rome, to Ming China, to revolutionary France and America or to Weimar Germany – you'll find that uncontrolled inflations are caused by overleveraged governments which resorted to printing as the easiest way to avoid explicit default (whereas inflation is merely an implicit default). It’s all very well for economists to point out that the cure for runaway inflation is simply a contraction of the money supply. It’s just that when you look at inflationary episodes you find that such monetary contractions haven't been politically viable courses of action.

Needless to say, "economists" are, for the most part, idiots:

Economists, we find, generally don’t understand this because economists look down on disciplines which might teach them it, such as history, because they aren’t mathematical enough. True, historians don’t use maths (primarily because they don’t have physics envy) but what they do use is common sense, and an understanding that while the economic laws might hold in the long run, in the short run the political beast must be fed.

The response of printing money is nothing new. Yes, one can come up with meaningless excuses that it is an asset swap which work great in theory, but when it comes to practice, forget one small thing. Money is and always has been first and foremost FUNGIBLE. Just ask the infinite asset rehypothecation accounts of all London-based companies.

I wrote about the Weimar Hyperinflation a few weeks ago and showed, for example, that Rudolf von Havenstein (Reichsbank president) was terrified of pursuing such a monetary contraction because he was so fearful of the social consequences rising unemployment and falling output would elicit. But the agonizing dilemma he faced, identical in principle if not in magnitude to that faced by policy makers today, is as old as money itself.

Dilution goes back further, as we have shown before.

In the 3rd century AD, as the Roman Empire became too large and unwieldy, its borders were consolidated and the great imperial expansion halted. Though necessary, this consolidation posed problems. While the Empire was in growth mode, driven by military conquest which strengthened public finances, the army paid for itself. It was an asset on the national balance sheet. But when that territorial growth was halted, a hole was created in the budget as while the army was still needed to defend the borders, it was no longer self-funding because there was no territorial expansion.


Roman emperors discovered that contracting expenditure to fit with new lower revenues was a difficult feat to pull off. So rather than contract military spending, public works or public entertainment – long-term necessities which were painful in the short run – they opted to buy time using successive currency debasements. Ultimately, this culminated in what would become the world’s first of many fiscally driven inflation crises (see charts below).


Two thousand years ago, the fiscal sobriety so clearly needed in the long run was subordinated to the short-run requirement to buy time. Hence the age-old short-term temptation to debase the currency and hope no one notices. Paring overstretched government balance sheets has never been easy. As the Romans should have done in the third century, developed market governments today will have to come clean to their citizens that since keeping the welfare promises they’ve made over the years will bankrupt them, those promises are going to have to be ‘restructured’ and government expenditure substantially tightened.

Where we find Grice's argument somewhat weak is his extrapolation that just because there are occasional examples where "leaders" have opted for short-term pain in exchange for long-term gain, we fail to see how this, in the current terminally corrupt and crony developed world system of governance which has been uZIRPed by banks through and through, is possible. After all short-term pain is no longer possible as even the smallest downtick leads to concerns of systemic collapse. Rememeber - the world is rapidly running out of money good collateral, a/k/a assets. That is all that matters.

Nonetheless, our view can be layered on top of that of Grice, as our conclusion would have far more stark implications for the real value of gold. In the meantime, those wondering if one should sell gold now, here is your answer.

What causes the political winds to change? A government crisis. In 2008, Ireland came very close to going the way of Iceland. They had their crisis. And historians today still refer to the “inflation fatigue” in Britain by the end of the 1970s. This was our crisis. So what we learn from these experiences and others like them is that a fiscal crisis is required to force a majority acceptance of the implications of an overleveraged government.


But the political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude. And while it’s true that more people are at least talking about it, talk is very cheap and no one is yet close to walking the walk. Such steps remain politically unpopular because we haven’t had our crisis yet. Given the clear unsustainability of government finances and the explosive path government leverage is on, a government funding crisis is both inevitable and necessary. Dubai and Greece are merely the first claps of thunder in what is going to be a long emergency.


Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK (witness the IMF’s recent recommendation that inflation targets be raised to 4%: IMF Tells Bankers to Rethink Inflation – WSJ). Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.

So he would sell gold and silver after a gigantic political change.  That sounds like a reset to me.  Until that happens, hang onto that life preserver. On a more uplifting (literally) note, this week's video is the world distance record for a single sheet of paper airplane.   To achieve the record, it took the arm speed of a 95 mile per hour fast ball.  Have a great week!