Posts Tagged ‘Bankrupt’
by Tyler Durden on 03/05/2011 23:14 -0500
When discussing central planning, as manifested by the policies of the world’s central banks, a recurring theme is the upcoming reversion to the mean: whether in economic data, in financial statistics, or, as Dylan Grice points out in his latest piece, in luck. While the mandate of every institution, whose existence depends on the perpetuation of the status quo, is to extend the amplitude of all such deviations from the trendline median, there is only so much that hope, myth and endless paper dilution can achieve. And alas for the US, whose 3.5% bond yields are, according to Grice, primarily due to “150% luck“, the mean reversion is about to come crashing down with a vengeance after 30 years of rubber band stretching. The primary reason is that while the official percentage of interest expenditures as a portion of total government revenues is roughly 10% based on official propaganda data, the real number, factoring in gross interest expense, and assuming a reversion to the historic average debt yield of 5.8%, means that right now, the US government is already spending 30% of its revenues on gross interest payments! And what is worse, is that the chart has entered the parabolic phase. Once the convergence of theoretical and real rates happens, and all those who wonder who will buy US debt get their answer (which will happen once the 10 Year is trading at 6% or more), the inevitability of the US transition into the next phase of the “Weimar” experiment will become all too obvious. Because once the abovementioned percentage hits 50%, it is game over.
Below Grice lays out the framework for the disinflation delusion that has permeated the minds of all economists to the point where divergence from the mean is now taken as gospel:
What drove the disinflation of the last thirty years? Politicians would say it was because they granted their central banks independence. But the pioneering experiment here didn’t take place until ten years into the disinflation, when the Reserve Bank of New Zealand Act 1989 gave that central bank the sole mandate to pursue price stability. Macroeconomists would site breakthroughs in our understanding. Except there haven’t been any. Today’s hard money/soft money debate is identical to the Monetarist/Keynesian debate of the 1970s, the US bimetallism agitation of the late 19th century, and the Currency vs Banking School controversy in the UK during the 1840s.
Was it the de-unionisation of the workforce? The quiescence of oil markets since the two extreme shocks of the 70s? The dumping of cheap labour from Eastern Europe, China and India onto the global labour market? Technology enhanced productivity growth? Or maybe it was just because the CPI numbers are so heavily manipulated?
Maybe it was all of these things. Maybe it was none of these things … for the little that it’s worth, my theory is that no-one has an adequate theory, other than it being down to the usual combination of luck and judgment on the part of policymakers … or about 150% luck. The problem is luck mean-reverts. The mammoth fiscal challenges (see chart below) currently being shirked by the US political class suggest that mean-reversion is imminent.
Ireland is probably the best example of an entity for which the cognitive dissonance between an imaginary desired universe and a violent snapback to reality has finally manifested itself after a 30 year absence:
Ireland provides a good illustration. Today it’s going through a real and wrenching depression – there is no other word for it and it is heartbreaking to watch – partly because the terms of its bailout are so onerous. And what may well be the seeds of a future popular backlash against the euro can be detected in the election of Fine Gael on a ticket of renegotiating the bailout terms, which currently require them to pay a 5.8% rate of interest.
Unlike Ireland, the US still has the luxury of being able to stick its head deep in the sand of denial.
Look at the following chart showing two hundred years or so of US government borrowing costs. Two hundred years is a lengthy period of time. There have been economic booms and financial panics, localized wars and world wars, empires have risen and empires have fallen, technological change has made each successive generation’s world unrecognizable from that which preceded it. Yet government yields have remained broadly mean-reverting (and the US has been one of the best run economies over that time – other governments’ bond yields demonstrate an unpleasant historic skew towards large numbers). Coincidentally enough, the average rate of interest over that period has been around 5.8%, the rate which the new Irish government today says is ‘crippling.’
And here is the math that nobody in D.C. will ever dare touch with a ten foot pole as it will confirm beyond a reasonable doubt that the US is now well on its way to monetizing its future (read: not winning)
In other words, Ireland is so indebted that it is struggling to pay a rate of interest posterity would barely yawn at. But Ireland isn’t the only one.Take the US government, for example, which currently pays around 10% of its revenues on interest payments. This doesn’t sound too bad. The problem is that those federal government interest payments are calculated net of the coupons paid into federally run programs (e.g. social security) as these are deemed ‘intragovernment transfers.’ Yet those coupons to social security are made to fund a real obligation to American citizens and as such, represent payments on a real liability. On a gross basis the US government pays out 15% of its revenues on interest payments, which makes for less comfortable reading. So the net numbers remain the most widely quoted.
And where the figure gets downright ugly is if one assumes that in order to find buyers for the $4 trillion in debt over the next two years (once the Fed supposedly is out of the picture after June 30), rates revert to the mean. Which they will. What happens next is a cointoss on whether or not we enter a Weimar-style debt crunch.
Suppose the US government had to pay the 5.8% yield it has paid on average over the last two hundred years? The share of revenues spent on gross interest payments would be a staggering 30% (see chart above). If it had to pay the 6.9% it’s paid on average since WW2, those gross interest payments would account for 37% of revenues. So it’s not difficult to see the potential for a dangerously self-reinforcing spiral of higher yields straining public finances, hurting confidence in the US governments’ ability to repay without inflating, leading to higher yields, etc.
Read the entire article HERE.
The city of Maywood will lay off all city employees and begin contracting police services with the Los Angeles County Sheriff’s Department effective July 1, officials said.
In addition to contracting with the Sheriff’s Department, the Maywood City Council voted unanimously Monday night to lay off an estimated 100 employees and contract with neighboring Bell, which will handle other city services such as finance, records management, parks and recreation, street maintenance and others. Maywood will be billed about $50,833 monthly, which officials said will save $164,375 annually.
“We will become 100% a contracted city,” said Angela Spaccia, Maywood’s interim city manager.
Deputies from the East Los Angeles Sheriff’s Station will begin patrolling the 1.2-square-mile city by the end of the month, said Capt. Bruce Fogarty of the Sheriff’s Contract Law Enforcement Bureau. The annual cost of providing those services for the small city is estimated at $3.6 million, Fogarty said.
At a council meeting Monday night, city leaders said they were forced to dismantle the Police Department and lay off city workers because they lost insurance coverage as a result of excessive police claims filed against the department. They also blamed years of financial abuse and corruption from the previous council.
“We’re limited on our choices and limited on what we can do,” Councilman Felipe Aguirre told the standing- room-only crowd.
Frustrated and enraged residents blame the council for the city’s predicament, and for not following an insurance agency’s recommendations, which council members had agreed to last August. The recommendations included hiring a permanent city manager.
Some suggested that city leaders should step down.
“You guys had the power to change it and you didn’t,” said City Treasurer Lizeth Sandoval, 28, who addressed the council as a resident. “You single-handedly destroyed the city.”
Sandoval, a city employee, will be laid off as part of the cuts.
Local activists, who refer to themselves as “A Group for a Better Maywood,” announced their intention to recall four of the council members: Felipe Aguirre, Edward Varela, Vice Mayor Veronica Guardado and Mayor Ana Rosa Rizo. The same group sought a similar recall in 2008 and failed.
Read the entire article HERE.