wildcard
29th May 2010, 02:20 AM
From the no sh*t Sherlock dept.
http://www.foxbusiness.com/index.html
http://www.foxbusiness.com/images/story/worldbroke_coin276.jpg
IS THE WORLD BROKE?: Our Blueprint to Bankruptcy
Friday, May 28, 2010
J.D. Miller, a certified public accountant from Vallejo, Calif., isn’t the least bit surprised by the growing debt crisis currently threatening economies around the world.
As a member of an ad hoc committee appointed by the city council in the early 1990s to review Vallejo’s troubled municipal finances, Miller made a clear and forceful argument that the Bay Area suburb was headed for bankruptcy unless systemic changes were made.
Specifically, something had to give or Vallejo’s budget was going to collapse under the weight of escalating costs tied to city employees’ labor contracts.
If employee salaries and benefits continued to climb at the rates at which they were climbing, Miller warned, and the city’s revenues maintained their current levels, Vallejo was headed toward a fiscal train wreck.
It took a few years, but the collision occurred and Vallejo filed for Chapter 9 bankruptcy in May 2008.
“They pretty much didn’t listen to us,†Miller said recently. “They said ‘thank you very much, now go away.’ It’s frustrating.â€
Now, Vallejo is being viewed as a template for cities, states and even countries whose credit cards seemed to have maxed out amid unchecked government spending, widespread corruption, excessive entitlements, greedy unions and a devastating lack of political leadership.
Throw a dart at a map and more than likely it will hit some place in danger of defaulting on its debt: California, New Jersey, New York, Illinois, Argentina, Venezuela, Spain, Portugal, or, most notoriously perhaps, Greece.
Then briefly consider some of the facts and figures tied to the fiscal holes that have been dug by the governments of the above-named locales.
California’s 2009 budget deficit of $26.3 billion has been pared to a ‘measly’ $19 billion in 2010. Meanwhile, New Jersey, with some of the highest property taxes in the U.S., is nevertheless struggling to fill a $10.7 billion shortfall. And New York and Illinois are facing $9 billion and $13 billion deficits, respectively.
Governors trying to fill those deficits are facing the wrath of public employee unions seeking to maintain the status quo.
Meanwhile, Argentina and Venezuela recently ranked one and two on a list compiled by CMA DataVision of major governments likely to default on their sovereign debt.
Across the Atlantic, lawmakers in Spain and Portugal, following in the footsteps of Greece, where the current crisis gained its toe-hold, have approved dramatic austerity plans designed to save billions of euros by cutting civil servants’ salaries by 5% and raising all manner of taxes.
But, as is the case in Greece, there are no guarantees that these austerity plans can be successfully implemented. And even if they are there’s the very real risk that such deep cutbacks will stall economic growth in these Southern European nations for years to come.
All of this poses a huge threat as the world struggles to recover from the worst financial crisis since the Great Depression.
“Greece may be beyond the point where austerity measures will help. And we (the U.S.) are going down the European path. We’ll likely be where Europe is in five six or seven years from now because our bureaucracy is so ineffective,†said Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
U.S. federal debt is projected to reach 140% of gross domestic product within two decades. By comparison, Greece’s federal debt is about 115% of its G.D.P.
Despite tough talk from politicians, Morici believes the U.S. is still headed in the wrong fiscal direction.
Take the recently passed health-care reform bill, for example. Morici sees it as another vast federal entitlement that will undoubtedly be mishandled by the government bureaucrats charged with running it.
Indeed, Morici holds that government is the reason health care is so expensive in the U.S. in the first place.
“Our problem is inefficiency and stupidity,†he said. “We just don’t have an effective government bureaucracy. Health care is a great example -- it’s essentially run by a shadow government known as the health insurance industry.â€
For those reasons, Americans -- and in particular the U.S. government, which is the largest single health- care consumer through its Medicare and Medicaid programs -- pay far more for medical care than consumers in other countries.
“The government is so riddled with politically correct rules, preferences and social policies that it’s impossible to have an effective civil service system,†Morici concluded.
While economists may not agree on the particulars of a solution for the world’s debt crisis, one thing everyone can agree on is that any attempt to address the problem has to be filtered to a political prism.
In the U.S., for instance, it’s doubtful that entitlements already in place can be altered to scale back on spending. While debt-laden countries in Europe – Greece, for example – are raising retirement ages to scale back on pensions, it’s unlikely politicians in the U.S. can muster the political will to raise the minimum age at which U.S. citizens can start receiving Social Security.
Portfolio manager Axel Merk, author of the recent book “Sustainable Wealth,†believes the U.S. will likely try to pay down its debt simply by printing more money and hoping for economic growth.
The risk of that type of strategy is inflation, but it’s a risk U.S. politicians are willing to take in lieu of scaling back entitlements.
“It may work until the next election,†Merk said. “But if we’re not tackling these major issues, inflation is the path of least resistance. That is the de facto solution.â€
Meanwhile, Miller said he vividly recalls the moment in 1993 when he knew Vallejo was headed for bankruptcy.
It was at a meeting with the city council and “all of a sudden it struck me,†he said. He took a magic market and drew a simple line graph on a board behind him. One line represented Vallejo’s revenue stream and the other the city’s employee costs – just the salaries and benefits. The graph showed that the two lines would collide the following year and that after that the city would be in a deficit.
“If the system didn’t get changed we’d wind up in bankruptcy. We didn’t want to be right, but the numbers were very clear,†Miller said. “None of this was rocket science. The contracts obligated them to pay more than they were taking in in revenue.â€
Shockingly, in 2000, seven years after Miller first raised red flags related to Vallejo’s labor contracts, the city council approved a plan that sweetened rather than scaled back employees’ retirement benefits.
The changes allowed police officers and firefighters to retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to keep pace with inflation. The old plan provided for a pension equal to 60% of their final pay at age 50.
To put that in workable numbers, a Vallejo police officer making $150,000 a year could retire at 50 on an annual pension of $135,000, bumped up each year to account for inflation.
Miller said the city council’s decision in 2000 didn’t necessarily surprise him, nor did Vallejo’s bankruptcy in 2008. And he isn’t surprised now that the rest of the world seems to be following in Vallejo’s footsteps.
“Vallejo is like the canary in the coal mine. Every government agency that I’m aware of operates the same way. There’s no incentive for them to change and there’s every reason not to change if you want to keep your job,†he said.
http://www.foxbusiness.com/index.html
http://www.foxbusiness.com/images/story/worldbroke_coin276.jpg
IS THE WORLD BROKE?: Our Blueprint to Bankruptcy
Friday, May 28, 2010
J.D. Miller, a certified public accountant from Vallejo, Calif., isn’t the least bit surprised by the growing debt crisis currently threatening economies around the world.
As a member of an ad hoc committee appointed by the city council in the early 1990s to review Vallejo’s troubled municipal finances, Miller made a clear and forceful argument that the Bay Area suburb was headed for bankruptcy unless systemic changes were made.
Specifically, something had to give or Vallejo’s budget was going to collapse under the weight of escalating costs tied to city employees’ labor contracts.
If employee salaries and benefits continued to climb at the rates at which they were climbing, Miller warned, and the city’s revenues maintained their current levels, Vallejo was headed toward a fiscal train wreck.
It took a few years, but the collision occurred and Vallejo filed for Chapter 9 bankruptcy in May 2008.
“They pretty much didn’t listen to us,†Miller said recently. “They said ‘thank you very much, now go away.’ It’s frustrating.â€
Now, Vallejo is being viewed as a template for cities, states and even countries whose credit cards seemed to have maxed out amid unchecked government spending, widespread corruption, excessive entitlements, greedy unions and a devastating lack of political leadership.
Throw a dart at a map and more than likely it will hit some place in danger of defaulting on its debt: California, New Jersey, New York, Illinois, Argentina, Venezuela, Spain, Portugal, or, most notoriously perhaps, Greece.
Then briefly consider some of the facts and figures tied to the fiscal holes that have been dug by the governments of the above-named locales.
California’s 2009 budget deficit of $26.3 billion has been pared to a ‘measly’ $19 billion in 2010. Meanwhile, New Jersey, with some of the highest property taxes in the U.S., is nevertheless struggling to fill a $10.7 billion shortfall. And New York and Illinois are facing $9 billion and $13 billion deficits, respectively.
Governors trying to fill those deficits are facing the wrath of public employee unions seeking to maintain the status quo.
Meanwhile, Argentina and Venezuela recently ranked one and two on a list compiled by CMA DataVision of major governments likely to default on their sovereign debt.
Across the Atlantic, lawmakers in Spain and Portugal, following in the footsteps of Greece, where the current crisis gained its toe-hold, have approved dramatic austerity plans designed to save billions of euros by cutting civil servants’ salaries by 5% and raising all manner of taxes.
But, as is the case in Greece, there are no guarantees that these austerity plans can be successfully implemented. And even if they are there’s the very real risk that such deep cutbacks will stall economic growth in these Southern European nations for years to come.
All of this poses a huge threat as the world struggles to recover from the worst financial crisis since the Great Depression.
“Greece may be beyond the point where austerity measures will help. And we (the U.S.) are going down the European path. We’ll likely be where Europe is in five six or seven years from now because our bureaucracy is so ineffective,†said Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
U.S. federal debt is projected to reach 140% of gross domestic product within two decades. By comparison, Greece’s federal debt is about 115% of its G.D.P.
Despite tough talk from politicians, Morici believes the U.S. is still headed in the wrong fiscal direction.
Take the recently passed health-care reform bill, for example. Morici sees it as another vast federal entitlement that will undoubtedly be mishandled by the government bureaucrats charged with running it.
Indeed, Morici holds that government is the reason health care is so expensive in the U.S. in the first place.
“Our problem is inefficiency and stupidity,†he said. “We just don’t have an effective government bureaucracy. Health care is a great example -- it’s essentially run by a shadow government known as the health insurance industry.â€
For those reasons, Americans -- and in particular the U.S. government, which is the largest single health- care consumer through its Medicare and Medicaid programs -- pay far more for medical care than consumers in other countries.
“The government is so riddled with politically correct rules, preferences and social policies that it’s impossible to have an effective civil service system,†Morici concluded.
While economists may not agree on the particulars of a solution for the world’s debt crisis, one thing everyone can agree on is that any attempt to address the problem has to be filtered to a political prism.
In the U.S., for instance, it’s doubtful that entitlements already in place can be altered to scale back on spending. While debt-laden countries in Europe – Greece, for example – are raising retirement ages to scale back on pensions, it’s unlikely politicians in the U.S. can muster the political will to raise the minimum age at which U.S. citizens can start receiving Social Security.
Portfolio manager Axel Merk, author of the recent book “Sustainable Wealth,†believes the U.S. will likely try to pay down its debt simply by printing more money and hoping for economic growth.
The risk of that type of strategy is inflation, but it’s a risk U.S. politicians are willing to take in lieu of scaling back entitlements.
“It may work until the next election,†Merk said. “But if we’re not tackling these major issues, inflation is the path of least resistance. That is the de facto solution.â€
Meanwhile, Miller said he vividly recalls the moment in 1993 when he knew Vallejo was headed for bankruptcy.
It was at a meeting with the city council and “all of a sudden it struck me,†he said. He took a magic market and drew a simple line graph on a board behind him. One line represented Vallejo’s revenue stream and the other the city’s employee costs – just the salaries and benefits. The graph showed that the two lines would collide the following year and that after that the city would be in a deficit.
“If the system didn’t get changed we’d wind up in bankruptcy. We didn’t want to be right, but the numbers were very clear,†Miller said. “None of this was rocket science. The contracts obligated them to pay more than they were taking in in revenue.â€
Shockingly, in 2000, seven years after Miller first raised red flags related to Vallejo’s labor contracts, the city council approved a plan that sweetened rather than scaled back employees’ retirement benefits.
The changes allowed police officers and firefighters to retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to keep pace with inflation. The old plan provided for a pension equal to 60% of their final pay at age 50.
To put that in workable numbers, a Vallejo police officer making $150,000 a year could retire at 50 on an annual pension of $135,000, bumped up each year to account for inflation.
Miller said the city council’s decision in 2000 didn’t necessarily surprise him, nor did Vallejo’s bankruptcy in 2008. And he isn’t surprised now that the rest of the world seems to be following in Vallejo’s footsteps.
“Vallejo is like the canary in the coal mine. Every government agency that I’m aware of operates the same way. There’s no incentive for them to change and there’s every reason not to change if you want to keep your job,†he said.