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Thursday, February 17, 2011

Like a Rotten Pumpkin California Sags and Oozes into Financial Oblivion

Like a Rotten Pumpkin California Sags and Oozes into Financial Oblivion

Abstract: Perusing the manifold self-inflicted blunders of the civilized world, even including places like California if we must, we note that many US states and nations are sinking in a gloomy bog of unrecoverable debt. This is the price of the Nanny State. There is observed among these entities a strong sense of fatalism and economic belligerent ignorance in the ranks of their so-called leaders as they seem to view massive spending as the singular and optimist solution to overspending and debt. Many nations are now forced to cut spending and institute severe austerity measures to even sustain their unreasonable deficits or they offer the appearance of such an attitude. Such a process of spending reduction is the very last item on a long list of progressive programs in the EU and states like California and nearly all of those failed states that emulate this wreckage. Austerity is evil. Several political and financial vectors collide on the issues of credit, taxes, spending and maintenance of expensive and inefficient social programs that asymptote toward debt infinity. Those on the left in power just refuse to set up any austerity programs and seem to invite default or bankruptcy. The process may now be regarded as the fatalistic outcome of leftist governments and may also be the intended culmination of their programs while they have power. They appear to be ready to pronounce capitalism a failure. They might confiscate some of our 401(k)s and roll them into Social Security.

Politics is the process of decision making in groups[1] and such decisions must be enforced by some form of coercion.[2] This force is political power. This definition applies to all known forms of government and is not an attribute of totalitarianism alone. It applies to all groups who would gather to make decisions as in family, sports, clubs and more. These decisions can become disastrous as we witnessed during July of 1914 where the outcome of decisions of numerous nations resulted in World War One and fifty one million dead. Nothing like this collection of decisions could be viewed in any other way than totally irresponsible, but Germany, England, Italy, France and other countries willingly followed this path toward financial oblivion. A careful reading of the 1957 book: War and Aftermath 1914-1929 by Pierre Renouvin enlightens us on the curious but celebrated practice of ‘diplomacy,’ its manifold failures, questionable utility, and the unavoidable events that led to World War 1, the forceful and fatal structuring of World War 2 and the many more wars of the 1920s.[3] FDR was not that different from Wilson, the Kaiser, Lloyd George, Winston Churchill, Adolph Hitler, Benito Mussolini and the other leaders of Germany, Austria, France and most of the western European states from 1900 to 1950. An analysis of such detailed histories do not offer us much solace or hope that governments can make reasonable decisions about levels of spending, debt, taxation or war.[4] This observation is based on the current government’s policies to address massive debt: more spending. Nations and states are being crushed by debt.

When we hear that we must ‘do something for the people,’ the people, whoever they are, eventually absorb the full brunt of the failure from this ‘something’ and suffer from starvation, oppressive government, poverty, unemployment, inflation, war or disease. Part of this frantic quest for alternatives to proven viable economic and social systems [i.e. capitalism with balanced budgets or very low debt] has produced disasters like the French Revolution[5], the Russian Revolution, the Great Proletarian Cultural Revolution[6] and many others. Many of the citizens of these movements fell under programs like The Reign of Terror[7], Dekulakization[8], The Russian Purges,[9] the famine in the Ukraine known as Holodomor (Ukrainian: Голодомор translation: death by starvation)[10] and events such as in the sadistic genocide of innocents by Pol Pot and the Khmer Rouge political party in Cambodia[11], There are too many examples of this madness to even list by title. So, the quest for power and wealth by political operatives goes on unabated under new names, the current one being ‘economic stimulus’ or, in my wording, unintelligent design[12] and recently the Apollo Alliance.[13] This is accomplished by QE or quantitative easing.

Most governments have a platter of optimistic goals. One major thrust of government is to enforce the process of redistribution of wealth[14] on dogmatic [‘do something for the people’] or other grounds. This process rarely works in principal as most of the time the poor remain poor if not worse off during and after such attempts. Shifting the means of production to those who are not skilled in capitalism usually leads to failure and disaster. In the USSR, for example, the promises of such a redistribution with land offerings for peasants and Kulaks did not fare well and the wealth of Russia was concentrated in a mere 4% of the population, the Communist Party, of course, and they squandered the wealth as far as they could go and the system collapsed. Marxism was thus tested for 74 years in Russia and elsewhere and is deemed a failure.

Most governments make grandiose promises that they cannot or will not fulfill. The concept of democracy allows such promises to buy votes from the trusting polis thus enabling politicians with political power. The government is lethally situated directly in the centroid of wealth, commerce and demands a share of this ranging from probably a minimum of 10% to a frequent 100%. In this economic sphere, and with ample political power, governments often struggle with taxes, spending and debt as a natural recourse of governance. Most governments on this planet have failed in several of these metrics. These processes many continue on and be more or less satisfactory while leaders consume capital and resources until certain limits of debt are reached and then the planned course of action starts to become unraveled. Many governments have crashed and burned over debts, inflation and default.

The US, EU, UK and other nations are now struggling with what might be deemed terminal debt and although they might have some recourse to address this debt in a reasonable manner they frequently refuse to follow those avenues as that might lead to a loss of political power or a collapse of the government. California is such a case. Overspending, to bribe voters to keep certain governments in power as we see in California[15][16][17][18] [Our National Leper[19][20]], New York, Illinois and other states, is testing the bond markets. The markets always win in the long run. They are clearly heading for default or bankruptcy.

The current California case is instructive concerning bad government:

California has approximately $80 bln in tax revenues and 105 bln in spending and the difference is the deficit. It is illegal in this state to have such debt in principle. The law is ignored or abrogated in some way as this spending continues on. They will continue to spend or borrow to sustain their Nanny State and leftist political groups and parties.

California pleads and threatens disaster if spending must be cut:

Welcome to California, circa 2012. Schools will give up on small class sizes. Cops will be scarcer. College tuition will soar by 7 to 10 percent. State workers will face more furloughs. Precocious 4-year-olds will have to wait until their fifth birthday to start kindergarten.

This bleak and broken level of public service could happen if $14 billion in tax extensions and increases sought by Gov. Jerry Brown aren't approved by voters in June.”--[21]Cuts aren't enough to balance California budget San Francisco Chronicle Wednesday, February 16, 2011 [Emphasis is mine in all quotes.]

This is a maudlin essay on doom and is meant to stir the soul and vote for higher taxes. The state is broke and cannot match revenues with spending. The political vector here is to shift the authorization for higher taxes away from the Assembly and ‘to the people.’ Algebraically, this means changes in the levels of taxation and spending to reach a balanced budget and also includes debt service. Politically, this means votes previously cast for promises from the government may be lost and severe changes in politics may be the result. From 2009 California was suffering a $26 billion dollar shortfall.[22] Things have not changed much in two years. The Republicans control part of the legislature and must vote with Democrats for taxation to increase. This is the deadlock and many attempts have been made to circumvent this law.

The ‘solution’ is then higher taxes or the usual redistribution of wealth by one means or another.

The report, requested by Senate Budget Committee head Mark Leno, a San Francisco Democrat, focuses on the proposed revenue raisers. Brown wants to increase the car tax, impose higher levies on top wage earners and extend the sales tax, all for another five years. The increases need a two-thirds approval from the Legislature to go on the June ballot, a high threshold that will require a measure of GOP support so far lacking.

The effect of the LAO report is to put Republicans squarely on the spot. If they block a vote, the party will, in effect, be slashing California's schools, social services, courts and law enforcement to unacceptable levels. The report makes it abundantly clear that the GOP mantra that cuts alone can solve the state's budget problems is a fantasy.” Cuts aren't enough to balance California budget

Threats. So, here we are again. The 2/3 majority vote rule is what restricts unbridled spending and taxation by the left. Notice that, in strict accordance with leftist propaganda trends, the conclusion is thrust up front in the title of the article. We expect that from a liberal paper. The rest of the copy merely supports the conclusion with clichés and platitudes.

This spending and taxation trend can persist unabated because there are certain ‘experts’ who assert with anvil-like authority that states and governments can spend their way out of debt:

Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.[23]-- 1938 in 2010 By Paul Krugman

This theorem applies to states too as they think they can stimulate their economics and grow out of the debt manacles. Many so-called economists such as Paul Krugman[24] see no major problem with massive spending that would exceed 100 % of our US GDP and beyond but offer no scenario to cover this debt later. All debt minimization plans show that this is not possible without massive spending cuts and probably much higher taxes. Now in California[25][26][27]and New York, along with several other tottering states, all cesspools of boiling, caustic spending, we observe a rush to escape default that includes the sale of junk-grade bonds, growing and taxing marijuana and tactless begging for alms. There is no visual insinuation of prudent spending cuts that might mitigate the debt anywhere in the world as far as I can see. They are heading directly into financial oblivion. The future has been wasted on the present Nanny States of various form. 
So, what is the intended outcome from such debt? 
It is clear that:
[1] There is no program that should be cut in the view of the left. Everything is essential and needs to be enlarged. 
[2] That ‘the people’ want such programs. 
[3] That raising taxes too high will just force business to [a] exit California or [b] exit the US. 

This mentality forces California and other states like IL, NY, MA, MD, NJ and possibly FL to continue to sink in unrecoverable debt. This is, of course, a terminal attitude that barks of fatalism and the stogy mentality that invites disaster. It appears that the left are willing to crash financially to that their nostrum of ‘equality’[28] might be maintained to the last second.

Advise from other experts:

There are many fine economists that are not blindly wedded to Keynesianism. In an open letter to Joseph Stiglitz of June 2002[29] we read about the use of deficits and debt to ease the pain of countries in dire debt:

The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.[30]-- An Open Letter By Kenneth Rogoff, [Emphasis is mine in all quotes.]

Kenneth is coauthor with Carmen Reinhart of the new book This Time is Different: Eight Centuries of Financial Folly. [31] Here is a link to a transcript of an interesting interview on sovereign defaults.[32]

Here is a good summary of what happens with too much debt:

“[1] Once debt becomes excessive, countries must go through time-consuming and often painful debt repayment and increased saving. They can’t merely grow out of the problem.

[2] With excessive debt, it’s not critical whether it’s owed to other nations or owed internally.

[3] Extreme debt damages not just total output, but also labor markets and prices of assets, such as financial investments.”[33]-- If 800 years tell us anything, debts, long recovery lie ahead

YOUR MONEY: History lesson

This applies to governments, provinces, states and other entities.

The ‘solution’ for California is for the US government to bail them out with gifts in perpetuity and assume the debt and socialize it among the nation’s taxpayers. This avenue fails because there are some dozen states in the US in urgent need of alms and the US has now pushed its national debt beyond a year’s GDP. Thus, the states cannot be bailed out and when the time comes as it is unknown who will bail out the US government.

Using the GM takeover as a hint to what is coming, the idea there was to stick the bondholders with much of the problem using haircuts.[34] This mechanism is echoed in Germany by Angela Merkel and others in the EU:

It was a grave error for Germany’s Angela Merkel and France’s Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder “haircuts” at this delicate juncture, ignoring warnings from ECB chief Jean-Claude Trichet that such talk would set off investor flight from high-debt states.”[35]-- Europe stumbles blindly towards its 1931 moment By Ambrose Evans-Pritchard

And an explanation for this measure:

One might argue that bondholders should have been punished for their errors long ago. The stench of moral hazard has been sickening, on both sides of the Atlantic. An orderly bankruptcy along lines routinely engineered by the International Monetary Fund is exactly what Greece needs. It makes no sense to push Greece further into a debt compound spiral by raising public debt from 115pc of GDP at the outset of the “rescue” to 150pc at the end of the ordeal.”[36]-- Angela Merkel consigns Ireland, Portugal and Spain to their fate By Ambrose Evans-Pritchard

So, people who buy sovereign bonds have committed some crime moral or legal? This is a hopeless mentality.

A prediction by a major EU official:

In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso out an ‘apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money.[37]--Nightmare vision for Europe as EU chief warns 'democracy could disappear' in Greece, Spain and Portugal By Jason Groves 15th June 2010

A mere extension of this government mentality of cheating bond holders out of some of their principle and profits gives us a peek into the potential future when frantic governments might attach a part of all of our 401(k)s and Roth IRAs and similar holdings.

It we look at this from the historical view, we find it is very common for governments to seek wealth by nefarious or other means from those who have some. This places investments and pension funds at risk. The probable outcome is that all pension funds and a part of the investments might be appropriated by the government and rolled into Social Security or Medicare just ‘to be fair.’ If that happens, we can depend on history again to inform us that leftist governments will burn away that wealth as well.

This all arises from the intent to redistribute the wealth no matter what. If nations and states go bankrupt then they can claim that ‘capitalism has failed’ and institute something on the order of socialism or worse.


Comments to:

[2] Democracy and Its Critics (ISBN: 0300049382 / 0-300-04938-2) By Dahl, Professor Robert A.

Yale University Press 1989 1st Ed. P 40-50.

[3] War and Aftermath 1914-1929 by Pierre Renouvin Harper & Row, 1968. Hardcover. First edition.

[14]Redistribution of wealth is the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, nationalization, charity or tort law.[1] Most often it refers to progressive redistribution, from the rich to the poor, although it may also refer to regressive redistribution, from the poor to the rich.[2] The desirability and effects of redistribution are actively debated on ethical and economic grounds.

[19] The Proud March of the Financial Lepers: Greece Leads the Way Down for California and Other Beggars.

[23] 1938 in 2010 By Paul Krugman [Emphasis is mine in all quotes.] Published: September 5, 2010

Krugman Offers Us Canned Circular Revisionism: We Can Repeat the War Time Successes of FDR.

[29] To Joseph Stiglitz,

Author of Globalization and Its Discontents

(New York: W.W. Norton & Company, June 2002)

The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”-- An Open Letter By Kenneth Rogoff, Economic Counsellor and Director of Research, International Monetary Fund

[30] An Open Letter By Kenneth Rogoff, [Emphasis is mine in all quotes.]

[32] Arrogance, Ignorance Recurring in Economic History Paul Solman speaks with economists Carmen Reinhart and Ken Rogoff about the financial crisis and how it compares to previous economic meltdowns

[34] Potentially the Biggest Stock Scam of the Century: The General Motors IPO.

“This attracted political attention and the Obama organization decided to fix the problem by nationalizing the company. This conforms to my theory of ‘spreading around the wealth.’[34] GM was swamped by $80 billion in debt and was going bankrupt. Our current Neo-Marxist liberal/radical government now blends fascism[34][34][34] with socialism in an attempt to redistribute the wealth and they applied this in fact as we saw in the GM and Chrysler bailouts where bond holders and stock holders were wiped out [a 70% haircut in the parlance for the bond holders] and the shrunken remains given to the unions while the management was replaced by orders from the White House.[34] The unions retained some 17% of the company [for what?? Political reciprocity??] and the US and Canada lent them 6.1 billion to get restarted. From money lying around in sprawling government project accounts, they ‘repaid’ the ‘loan’ 5 years ahead of schedule and now celebrate. They intend to hire soon but at lower wages according to Mark Reuss who heads up GM of North America. Thus, their debt was wiped out by our government. The taxpayers are stuck with 45 billion in stock and now GM wants to offer an IPO, which will most likely dilute the shares and secure a loss for the taxpayers. This is all an illusion as their labor costs remain uncompetitive against other car manufactures that make profits in this country. We have substantially subsidized a failing company for a political return and we will have to perpetually rescue this monster from time to time. Wages and benefits must come way down before GM can be successful in a free market. “[34]

[37] Nightmare vision for Europe as EU chief warns 'democracy could disappear' in Greece, Spain and Portugal By Jason Groves 15th June 2010