Mish's Global Economic Trend Analysis

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• 6 New Governors Seek to Kill Defined Benefit Plans; 8 of 9 CA Cities Vote to Reduce Benefits; Fraudulent Promises (and what to do about them)
• Irish Citizens Sold Down the River in "Firepower of Stupidity"
• Following the Path of Japan and the Madness of Bernanke Fighting Just That

6 New Governors Seek to Kill Defined Benefit Plans; 8 of 9 CA Cities Vote to Reduce Benefits; Fraudulent Promises (and what to do about them) Posted: 21 Nov 2010 07:10 PM PST Defined benefit pension plans are in trouble across the country, but politicians in states like Arizona and Illinois are reluctant to tackle the problem. Voters across the country however, have taken matters into their own hands by refusing to agree to tax hikes and by voting to reduce benefits. In California, voters in eight of nine cities or counties approved measures to reduce public-pension benefits. Moreover, six new governor-elects want to kill defined benefit plans. Finally, the speaker of the House in Arizona wants a constitutional amendment to lower pension benefits. Arizona Central covers these issues and more in a pair of articles. Let's start with a look at Pension reform a difficult task. The Arizona Legislature's incoming House speaker and Senate president said lawmakers can go only so far to slow the rate of growth for the state's pension systems, which an Arizona Republic analysis found cost taxpayers $1.39 billion last year, a 448 percent increase from a decade ago. These rising taxpayer costs, coming at a time when state and local governments have cut services to balance their budgets, have been driven in part by the pension trusts' investment losses during the market downturn but also by ongoing pension-benefit improvements and efforts to hold down costs for employees themselves. "It's time we get serious about reforming the public-pension systems," said House Speaker Kirk Adams, R-Mesa. "But if we are going to have any fundamental change, the voters will have to get involved." Adams said he would work to get the Legislature to have voters in 2012 change the state Constitution, which prohibits benefits from being diminished for those in the public-pension systems. Adams said he has yet to get support from the Republican-controlled Senate or Gov. Jan Brewer, a fellow Republican. In 1998, the intent of the measure was to protect public-pension trust funds, which had surpluses at the time, from being raided by lawmakers in the event of lean budget times. Since then, the pensions have not been touched by lawmakers. In a significant indication of change, six newly elected governors in Alabama, Nevada, Pennsylvania, Tennessee, Wisconsin and Rhode Island have suggested that they want to amend their states' pension systems to 401(k) plans similar to the private sector's, said Stephen Fehr, a pension expert for the Pew Center on the States. The center is a non-profit policy-advocating group. "They want to shift away from guaranteed pensions," Fehr said. Even in states with strong labor unions, such as California and Illinois, action has been taken, Fehr noted. Voters in eight of nine California cities and counties approved measures during the recent election to cut public-pension benefits. In addition, Fehr said, more than 40 suburban communities in Chicago approved a ballot question that called on the Illinois Legislature to reduce benefits for future state workers. Arizona House Speaker Kirk Adams Proposes Constitutional Amendment There is much more in the article, please give it a look. Also consider House speaker unveils sweeping plans Adams plans next session to ask lawmakers to: - Eliminate the Deferred Retirement Option Plan for public-safety officers. This program costs tens of millions of dollars, providing lump-sum payments to police and firefighters who agree to defer retirement for up to five years and stay on the job. - Prohibit public employees from retiring and returning to work. The practice of "double-dipping" reduces contributions to the pension systems by millions of dollars. - Prohibit public officials convicted of crimes related to official duties from receiving pensions. - Eliminate the pension system for elected officials and move judges who are in that plan into the larger Arizona State Retirement System. Pensions for elected officials are the best in the state. - Change the state's pension plans, which have guaranteed payouts, to 401(k)-type systems. - Refer a constitutional amendment to voters in 2012 to allow pension benefits to be reduced. A provision in the Arizona Constitution prohibits benefits from being diminished. Fraudulent Promises Need Not Be Kept Many will say we cannot renege on promises. The reality is those promises are invalid because they came about as a result of fraud. Politicians got into bed with public unions by making promises they knew they could not keep, in return for endorsements from unions to get elected. The entire vote-buying process by unions is fraudulent. No one represented taxpayers, even though public workers are supposed to be public servants. It is not at all wrong to take away promises made via fraudulent vote buying, influence peddling, and bribes. The same applies to public union wages as well. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Irish Citizens Sold Down the River in "Firepower of Stupidity" Posted: 21 Nov 2010 04:32 PM PST Today the Irish Government sold its citizens into debt slavery by agreeing to guarantee stupid loans made by German, British, and US banks. Those loans fueled one of the biggest property bubbles in the world. Ireland has since crashed. Ireland Agree To Bailout Please consider Ireland Seeks Bailout as 'Outsized' Problem Overwhelms Nation Ireland applied for a bailout to help fund itself and save its banks, becoming the second euro member to seek a rescue from the European Union and the International Monetary Fund. Irish Prime Minister Brian Cowen said he expects talks on the package to be completed in the "next few weeks." Finance Minister Brian Lenihan said the loan will be less than 100 billion euros ($137 billion), though he refused to give any further details at a press conference in Dublin today. "A small sovereign like Ireland faced with an outsized problem that we have in our banking sector, cannot on its own address all those problems," Lenihan said. Ireland may not draw down on the entire loan, he said. While Ireland may not fully use any cash it gets from the EU and IMF, Lenihan said the size of the package "is important to demonstrate" the "firepower that stands behind the banking system." The Irish turmoil has also reopened tensions about the governance of the euro region after German Chancellor Angela Merkel last month called for bondholders to foot more of the bill of European bailouts. Her stance, criticized European Central Bank President Jean-Claude Trichet, sparked a bond market selloff. Bondholders Should Foot Entire Bill Trichet is pissed about common sense statement by German Chancellor Angela Merkel about who should foot the bill. Actually, Merkel did not go far enough. When you make stupid loans you pay the price. Or at least you should. But no! Trichet as well as the Irish Prime Minister seem to think that Irish taxpayers should bail out the Irish banks (which is in reality a bailout of German, and UK banks that made piss poor loans to Ireland). Why the average Irish citizen should have to bail out foreign bondholders is beyond me, but I do note that the same happened in the US with taxpayers footing an enormous bill for Fannie Mae, Freddie Mac, and AIG. No matter what stupid thing banks do, prime ministers and presidents are all too willing to make the average taxpayer foot the bill for the mess. That by the way,is one reason why we get into these messes in the first place. For a full text of the actual bailout agreement, please see Government statement on request for support. I must say it is pretty boring lacking in details. Firepower of Stupidity Finance Minister Brian Lenihan bragged about the "firepower that stands behind the banking system." Yes there is firepower alright, a firepower of stupidity. Wikipedia notes the population of Ireland is approximately 4.35 million. Going into debt to the tune of $137 billion would saddle the average Irish citizen with $31,494. How long will it take to pay that back? For whose benefit? Perhaps a better question is will it be paid back? By agreeing to take on that debt, and sticking it to the Irish taxpayers who will be forced to accept various austerity measures to pay back that debt, Irish Prime Minister Brian Cowen and Finance Minister Brian Lenihan just sold Ireland down the river. For additional insight on how the crash affects Ireland, please see Ghost Estates and Broken Lives: the Human Cost of the Irish Crash Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Following the Path of Japan and the Madness of Bernanke Fighting Just That Posted: 21 Nov 2010 01:13 AM PST I have been saying for 5 years the US would follow the path of Japan. An interesting chart in the New York Times shows this is indeed what has happened. click on chart for sharper image Following Japan's Path, So Far In the United States, the core consumer price index, which excludes food and energy prices, rose 0.6 percent in the 12 months through October. That was the smallest 12-month gain since government calculating the figure in the 1950's. The chart shows the 12-month changes in core CPI for the US and Japan, in the years before and after housing prices peaked in each country. The above chart and commentary is from After the Fed's Action, Watching Inflation's Trajectory Since the collapse of the housing market in the United States and the beginning of the global financial crisis, the Federal Reserve has made avoiding deflation a major priority, recalling the experience of Japan after its bubble burst in the early 1990s. The Fed has set an annual inflation target of 2 percent or a little lower, but is not getting it. The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate — excluding food and energy — rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession. As the accompanying chart indicates, the core inflation figures are charting a path roughly similar to one shown in Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made. This week, a group of Republicans proposed to change the Fed's dual legal mandate, which calls on it both to keep inflation tame and to fight unemployment. "It's time to return the Federal Reserve to the singular mission of protecting the fundamental strength and integrity of the dollar," said Representative Mike Pence of Indiana, a Republican and chief sponsor of the proposal. There are times when the dual mandate seems contradictory, but this is not one of them, and it is unlikely the Fed would change course if it had a single mandate. Major Disagreements With Times Article Although I agree with the premise "we have been following the path of Japan", I sure disagree with the undertones that the Fed can or should do something about it. Japan is now in debt to the tune of 200%+ of GDP. It build bridges to nowhere hoping to cure deflation. It is madness. All Japan has to show for massive fiscal stimulus is debt. Moreover, as soon as Japanese interest rates spike to 3% or so (Something guaranteed to happen, we just don't know when), Japan's interest on its national debt will exceed all income. This is the path the US is heading down unless we change course. Yes it will be painful, but after a world record housing party it is the height of foolishness to think there will not be a massive hangover as a huge price to pay. It is startling that Paul Krugman and other Nobel prize winning economists cannot see the foolishness of proposing we can spend our way to prosperity. Ironically, the average 12th grader can see the foolishness of it, but the average academic professor cannot. Unfortunately Congress (both Republicans and Democrats) have been unwilling to deal with the issue as well. Republicans Need to Admit US Cannot Afford to be World's Policeman Regardless of what Republicans may think, we can no longer afford to be the world's policeman. For details please see Cost of War Since 2001; Federal outlays and revenues, 1940-2015. Democrats Need to Admit Problem with Public Unions States are bankrupt because of pension promises that cannot and will not be met. Public unions have destroyed states and municipalities. State pension plans are $3 trillion in the hole. For more details, please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State? Thus, no matter what Democrats think, we cannot afford our love affair with public unions, union wages, and most importantly, union benefits. Both parties need to rework the healthcare bill so that it contains provisions that will actually encourage lower costs and not damage small businesses. The bill as it sits made matters worse. Search for Scapegoats Avoids the Truth Somehow, some way, if you listen to Treasury Secretary Geithner and economist Paul Krugman, all of these problems are supposed to go away if only China would float the Yuan. Well none of this will go away as long as the US looks for scapegoats instead of admitting reality. That reality is we are on the road to bankruptcy and neither Keynesian nor Monetarist stimulus will help. Our problems are structural in nature and everyone needs to admit there will be no quick solutions and we cannot spend our way out of this mess. The only thing that can put the US back on track is fiscal prudence and sound monetary policy. Unfortunately, no one wants to hear the truth. Madness of Bernanke Bernanke wants prices to rise 2% a year. One problem is he does not count food, energy, or housing. Although OER (Owners Equivalent Rent) is the largest component of housing, rent and housing prices are two different things. Property taxes and sales taxes are yet another thing, and those are not factored into the CPI either. We are clearly following the path of Japan, especially if we include an analysis of housing and equity prices including the Nasdaq. Yet to the pocketbook of the average US citizen, costs are going up, wages and benefits are going down (except of course for Wall Street and public employees). Bernanke Doubly Wrong Regardless of what your position is regarding measuring inflation (prices or credit-based), Bernanke is horrendously wrong. It is sheer madness in a world of global wage arbitrage, where 14 million are unemployed, where the unemployment rate is close to 10%, to pursue a policy of attempting to force prices up, to meet some asinine idea that prices need to rise 2% a year, when to the perspective of the average consumer prices are going up much more than that, via taxes alone, let alone the grocery store and gasoline pump. Berkanke's policies are just as mad from the perspective credit. In a fiat credit-based regime, there will be no significant sustainable hiring or economic growth when consumer and business credit is collapsing. Net credit creation has been negative for 10 quarters. Bernanke is attempting to stimulate lending, and the Fed can print all the money it wants. However, the Fed cannot force banks to lend or consumers to borrow. For now, Bernanke's efforts have caused rising commodity prices, which is hurting small businesses that cannot pass on those price increases because consumers are tapped out. The net effect of the policies of this Fed and this administration is small businesses are getting crucified in a price squeeze. Thus, whether you view inflation from a price perspective, or from the proper perspective of credit expansion, Bernanke is simply wrong. His policies have failed. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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