Borrowing

The Civic Federation Analyzes Chicago’s FY2015 Budget

The last time I talked about The Civic Federation (an independent, non-partisan government research organization that provides analysis and recommendations on government finance issues for the Chicago region and State of Illinois) was back on March 4, when they proposed a five-year plan to balance the Illinois state budget, eliminate its huge bill backlog, and reduce income tax rates. But yesterday, the group released a new report on the City of Chicago’s proposed budget for fiscal year 2015. From their press release Monday:

Civic Federation Supports FY2015 Chicago Budget

Recent Progress Threatened by Pension Funding Crisis, Borrowing for Operations

In a report released today, the Civic Federation announced its support for the City of Chicago’s proposed FY2015 operating budget of $7.3 billion but expressed deep concern for how the City will manage rising pension costs and debt service payments in future years. The full 101-page analysis is available here.

The FY2015 budget closes a $297.3 million deficit with reasonable structural changes including targeted tax and fee increases, vacancy eliminations and other operational efficiencies. The budget also reflects significant actions toward long-term stability including the 2014 pension reform law for the City’s Municipal and Laborers’ pension funds and the continued phase out of the City’s retiree health care subsidy and planned transition of most retirees to coverage under the federal Affordable Care Act.

“Mayor Emanuel and his team are continuing to make the reasonable changes and bold decisions necessary to stabilize Chicago’s finances,” said Laurence Msall, president of the Civic Federation. “Two issues, however, threaten to erase all recent progress: the pension funding crisis and the administration’s continued use of borrowing for operations through the issuance of refunding bonds.”

Landmark pension reforms were enacted in June 2014, but only for two of the City’s four pension funds. The City’s Police and Fire pension funds remain dangerously close to running out of funds with market value funded ratios of only 27.0% and 31.7% respectively in FY2013. The Illinois General Assembly passed legislation in 2010 that mandates a sharp $550 million increase in contributions to the Police and Fire funds. This change, even without considering increased contributions to the City’s Municipal and Laborers’ funds, would require a significant increase in the City’s property tax levy, crippling cuts to City services, or both. The Mayor, City Council and State legislators must work together to create a reform framework for the Police and Fire funds that will stabilize the funds at an affordable cost to taxpayers. The Civic Federation also recommends that the City study ways to consolidate its pension funds, including the possibility of merging its Police and Fire funds with suburban and downstate public safety funds.

Over the last three fiscal years, the City of Chicago reduced its annual debt service payments by refunding bonds that are due to mature and extending the life of these bonds for an additional 30 years, a practice referred to as “scoop and toss.” This practice dramatically increases the cost of providing government services. It also could threaten the City’s ability to issue future debt by filling the out years of the City’s debt service schedule with previously issued bonds. The Civic Federation urges the City to develop a strategy for ending this costly and unsustainable practice.

The Federation’s full report also discusses the creation of the City Council Office of Financial Analysis in 2013. The office was intended to give aldermen access to the independent information and analysis they need to be effective stewards of the City’s finances. A delay in fully implementing the office means aldermen will not have access to this resource before they vote on the FY2015 budget.

You can read the 101-page report entitled City of Chicago FY2015 Proposed Budget: Analysis and Recommendations on The Civic Federation’s website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Tuesday, November 4th, 2014 Bonds, Borrowing, Fiscal Policy, Government No Comments

Profitable Assets, Professions In Germany’s Hyperinflation Of The 1920s

Since I started being concerned back in 2004 about the prospect of a U.S. financial crash, I’ve been interested in reading about the everyday lives of the people who lived through economic collapses.

Why? Because I believe there are valuable lessons to be learned for what I think is coming down the road for us here in America.

I haven’t really come across any good Great Depression accounts yet (if you know of one- shoot me over a suggestion). But the other night, I happened to stumble upon a rather lengthy article on the website of Der Spiegel (Germany) that provided a great deal of insight of what went on in Germany during their devastating bout with hyperinflation in the 1920s. Alexander Jung even went so far as to identify the financial “winners” and “losers” during that period of time. Jung wrote back on August 14, 2009:

The only objects of real value were tangible assets: diamonds and coins, antiques, pianos and art. The works of contemporary artists like Lyonel Feininger, Paul Klee, Max Pechstein and Karl Schmidt-Rottluff were in especially high demand. And if you had foreign currency, you lived like a king

The stupid ones were those who had nest eggs: the thrifty, holders of government bonds, but primarily the country’s pensioners. In other words, those who received money without having to work for it, who lived on their pensions or the interest on their savings. Large sections of the middle classes saw themselves stripped of their assets, losing almost everything they had set aside for years. Banks, savings banks, and insurance companies suffered huge losses and were left with nothing but their paper money. As a result, they had to start the majority of their businesses from scratch in 1924.

By perverse contrast, the winners of the hyperinflation were those with massive debts; first and foremost the state, but also private individuals who had borrowed money to buy houses, construction land or farmland, and whose loans were slashed by the switch to the rentenmark.

Some industrialists made huge gains from the period of hyperinflation. Hugo Stinnes, whom Time magazine crowned “Germany’s new Kaiser,” built up an immense corporate empire comprising heavy industry, newspapers, ships and hotels — all based on a mountain of debt. As late as the summer of 1922, Stinnes was recommending that people continue capitalizing on “the weapon of inflation.” Indeed manufacturers and craftsmen in general profited from the crisis since they possessed plants and buildings — that is, tangible assets that outlived the currency switch.

Most farmers also did extremely well. “They had money to burn, and spent it willy-nilly,” writer Lion Feuchtwanger recalled. Some bought themselves entire stables of racehorses, others expensive cars. “Farmer Greindlberger drove from the grimy village street of Englschalking to Munich in an elegant limousine complete with a liveried chauffeur, while he himself was dressed in a brown velvet jacket and a green chamois-tufted hat,” Feuchtwanger wrote of the rural rich…

(Editor’s note: Bold added for emphasis)

That last bit about farmers buying expensive cars reminds me of what “crash prophet” Jim Rogers has been telling anyone who will listen:

The farmers are going to be driving Lamborghinis and Maseratis.

Anyway, the quote doesn’t do the piece justice. I recommend you read the entire article on the Der Spiegel site here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Sino-Russian Natural Gas Deal Blow To U.S. Dollar Supremacy?

“The Obama administration is playing down an increasingly warm relationship between its main global rivals, China and Russia, that it may have inadvertently encouraged.

U.S. officials maintain there is nothing to fear from the growing alliance between Moscow and Beijing, even as each throws its weight around in neighboring regions like Ukraine and the South China Sea and at international forums like the United Nations, where on Thursday they double-vetoed the latest in a series of Security Council resolutions on Syria.

Yet when coupled with growing cooperation between Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, in other areas- notably, a new $400 billion natural gas deal and apparent agreement on the crisis in Ukraine- many believe Russia and China may now or may soon represent a powerful new alliance challenging not only the United States, but also the Western democratic tradition that the U.S. has championed globally…”

-Associated Press, May 23, 2014

You may have heard about that $400 billion natural gas deal that was just struck between China and Russia. Or maybe you didn’t, as I’ve noticed the mainstream media hasn’t really been talking about it too much. Most of the outlets that did neglected to talk about the potential ramifications for the U.S. dollar.

There were exceptions. From the BBC News website on May 22:

Some papers are also analysing the impact of the deal on the world currency market.

A commentary in the Beijing Youth Daily says the deal will probably encourage more countries to not trade in US dollars if China and Russia decide to switch to clearing payments in Russian roubles and the yuan.

“The world economy and finance will then embark on a process to get rid of the US dollar, and the dominance of the dollar will gradually lose its support. The US will then face more challenges in its ability to control global economics and politics,” it says…

From Liam Halligan on The Telegraph (UK) website yesterday:

The real danger, in my view, is rather more abstract — but deadly important nevertheless. If Russia’s “pivot to Asia” results in Moscow and Beijing trading oil between them in a currency other than the dollar, that will represent a major change in how the global economy operates and a marked loss of power for the US and its allies.

With the dollar as the world’s petrocurrency, it also remains the reserve currency of choice for central banks globally. As such, the US is currently able to borrow with “exorbitant privilege”, as it has for decades, simply printing money to pay off foreign creditors.

With China now the world’s biggest oil importer and the US increasingly stressing domestic production, the days of dollar-priced energy, and therefore dollar-dominance, look numbered. Beijing has recently struck numerous agreements with major trading partners such as Brazil that bypass the dollar. Moscow and Beijing have also set up rouble-yuan swap facilities that push the greenback out of the picture.

If Russia and China now decide to drop dollar energy pricing totally, America’s reserve currency status could unravel fast, seriously undermining the US Treasury market and causing a world of pain for the West. This won’t happen tomorrow or next year. It’s unlikely even by 2020. But by announcing this deal, Russia and China turned the screw half a twist more…

(Editor’s note: Bold added for emphasis)

Then there’s this from Max Keiser, an American filmmaker and host of the Keiser Report, a financial show on RT. From The Washington Times website earlier today:

He said the $400 billion, 30-year deal will further the strategic goals of Moscow and Beijing to diminish the status of the U.S. dollar by conducting world trade in critical commodities such as oil and gas using other currencies.

Russia is the world’s biggest producer of commodities such as crude oil, gold and titanium. China is the world’s biggest consumer of these commodities.

Both countries have chafed for years at having to conduct purchases and sales in dollars, as is customary worldwide. The gas deal announced in Beijing on Wednesday would be the first major commodities contract to be settled in Russian rubles and Chinese yuan rather than dollars.

“This means the U.S. dollar’s days as the world reserve currency are numbered,” said Mr. Keiser, noting that Russia and China have been investing heavily in gold.

Many analysts question whether Moscow and Beijing can succeed in displacing the dollar as the world’s reserve currency. If that happens, however, it likely would usher in a period of global financial instability and force Americans to pay much more for the massive amounts of imported energy, Mr. Keiser said…

(Editor’s note: Bold added for emphasis)

According to the Economist Intelligence Unit- the research and analysis division of The Economist Group, the sister company to The Economist newspaper- on May 22, it has been reported payments for the gas will be made in Chinese yuan rather than U.S. dollars.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

“China media: Russia gas deal.” BBC News. 22 May 2014. (http://www.bbc.com/news/world-asia-china-27514395). 25 May 2014.

Halligan, Liam. “Russia-China gas deal could ignite a shift in global trading.” The Telegraph. 24 May. 2014. (http://www.telegraph.co.uk/finance/comment/liamhalligan/10854595/Russia-China-gas-deal-could-ignite-a-shift-in-global-trading.html). 25 May 2014.

Hill, Patrice. “Russia’s Putin gains strategic victory with Chinese natural gas deal.” The Washington Times. 25 May 2014. (http://www.washingtontimes.com/news/2014/may/25/russias-putin-gains-strategic-victory-with-chinese/). 25 My 2014.

“The Sino-Russian gas deal.” Economist Intelligence Unit. 22 May 2014. (http://www.eiu.com/industry/article/431836627/the-sino-russian-gas-deal/2014-05-22) 25 May 2014.

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Russia To Attack Petrodollar?

Here’s another story that’s not getting much attention this week:

Russia threatening to replace U.S. dollar-denominated transactions for their exports

Gleb Stolyarov reported on Reuters.com this morning:

Russia, keen to dodge threatened Western sanctions on its companies over the Ukraine crisis, said on Wednesday it was looking at ways for major state-owned exporters such as energy giants to be paid in roubles.

The idea of major exporters being paid in roubles rather than dollars has been gaining ground in recent weeks in response to sanctions imposed by the West on officials and companies over Russia’s annexation of Crimea and an uprising in Ukraine’s east.

“There are certain risks, but we are preparing a mechanism, we are working on it,” Finance Minister Anton Siluanov told reporters during a visit to Russia’s Baltic enclave of Kaliningrad…

(Editor’s note: Bold added for emphasis)

So exports would be paid for in rubles rather than dollars. So what?

Michael Snyder of The Economic Collapse blog highlighted what could be at stake. Snyder wrote yesterday:

This would essentially be like slamming an economic fist into our nose.

You see, Russia is not just a small player when it comes to trading oil and natural gas. The truth is that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world.

If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the monopoly of the petrodollar

(Editor’s note: Bold added for emphasis)

Snyder continued:

So why is the petrodollar so important?

Well, it creates a tremendous amount of demand for the U.S. dollar all over the globe. Since everyone has needed it to trade with one another, that has created an endless global appetite for the currency. That has kept the value of the dollar artificially high, and it has enabled us to import trillions of dollars of super cheap products from other countries. If other nations stopped using the dollar to trade with one another, the value of the dollar would plummet dramatically and we would have to pay much, much more for the trinkets that we buy at the dollar store and Wal-Mart.

In addition, since the U.S. dollar is essentially the de facto global currency, this has also increased demand for our debt. Major exporting nations such as China and Saudi Arabia end up with giant piles of our dollars. Instead of just letting them sit there and do nothing, those nations often reinvest their dollars into securities that can rapidly be changed back into dollars if needed. One of the most popular ways to do this has been to invest those dollars in U.S. Treasuries. This has driven down interest rates on U.S. debt over the years and has enabled the U.S. government to borrow trillions upon trillions of dollars for next to nothing…

So if Russia really does pull the trigger on a “de-dollarization” strategy, that would be huge – especially if the rest of the planet started following their lead…

So would the rest of the planet follow Russia’s lead? Consider the following from the website for The Voice of Russia, the Russian government’s international radio broadcasting service. Valentin Mândrăşescu reported yesterday:

Of course, the success of Moscow’s campaign to switch its trading to rubles or other regional currencies will depend on the willingness of its trading partners to get rid of the dollar. Sources cited by Politonline.ru mentioned two countries who would be willing to support Russia: Iran and China. Given that Vladimir Putin will visit Beijing on May 20, it can be speculated that the gas and oil contracts that are going to be signed between Russia and China will be denominated in rubles and yuan, not dollars

(Editor’s note: Bold added for emphasis)

Stay tuned. This could get ugly.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Stolyarov, Gleb. “UPDATE 2-Russia, wary of sanctions, wants exporters to be paid in roubles.” Reuters.com. 14 May 2014. (http://www.reuters.com/article/2014/05/14/russia-exports-rouble-idUSL6N0O01RI20140514). 14 May 2014.

Snyder, Michael. “De-Dollarization: Russia Is On The Verge Of Dealing A Massive Blow To The Petrodollar.” The Economic Collapse. 13 May 2014. (http://theeconomiccollapseblog.com/archives/de-dollarization-russia-is-on-the-verge-of-dealing-a-massive-blow-to-the-petrodollar). 14 May 2014.

Mândrăşescu, Valentin. “Russia strives to exclude the dollar from energy trading.” 13 May 2014. (http://voiceofrussia.com/2014_05_13/Russia-strives-to-exclude-the-dollar-from-energy-trading-5138/). 14 May 2014.

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CBO: Updated 2014-2024 Budget Projections Show Substantially Rising Budget Shorfalls, Federal Debt

That idea that the U.S. could someday resemble a “banana republic” might not be too far off the mark. From the non-partisan Congressional Budget Office website today:

As it usually does each spring, CBO has updated the baseline budget projections that it released earlier in the year…

Between 2015 and 2024, annual budget shortfalls are projected to rise substantially—from a low of $469 billion in 2015 to about $1 trillion from 2022 through 2024—mainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. CBO expects that cumulative deficits during that decade will equal $7.6 trillion if current laws remain unchanged. As a share of GDP, deficits are projected to rise from 2.6 percent in 2015 to about 4 percent near the end of the 10-year period. By comparison, the deficit averaged 3.1 percent of GDP over the past 40 years and 2.3 percent in the 40 years before fiscal year 2008, when the most recent recession began. From 2015 through 2024, both revenues and outlays are projected to be greater than their 40-year averages as a percentage of GDP (see the figure below)…

In CBO’s baseline projections, federal debt held by the public reaches 78 percent of GDP by 2024, up from 72 percent at the end of 2013 and twice the 39 percent average of the past four decades (see the figure below). As recently as the end of 2007, federal debt equaled just 35 percent of GDP

Such high and rising debt would have serious negative consequences. Federal spending on interest payments would increase considerably when interest rates rose to more typical levels. Moreover, because federal borrowing would eventually raise the cost of investment by businesses and other entities, the capital stock would be smaller, and productivity and wages lower, than if federal borrowing was more limited. In addition, high debt means that lawmakers would have less flexibility than they otherwise would to use tax and spending policies to respond to unexpected challenges. Finally, high debt increases the risk of a fiscal crisis in which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates…

(Editor’s note: Bold added for emphasis)

You can read the entire assessment and view the complete document on the CBO website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Peter Schiff: No Recovery, Just An Illusion Of Prosperity

I first started paying attention to Euro Pacific Capital’s Peter Schiff just prior to picking up his book Crash Proof: How to Profit From the Coming Economic Collapse (now Crash Proof 2.0, second edition) shortly after its early 2007 release. While some of the calls he made in that controversial text are still playing out, others have already come to fruition.

Subsequently, Schiff has been given credit for correctly-calling the U.S. housing bubble and its burst, and the 2008 global economic crisis.

Being one of Survival And Prosperity’s “crash prophets,” his latest investment recommendations are chronicled on this blog. As are his economic analyses and forecasts as well.

Here’s a recent breakdown of what Schiff sees going on with the U.S. economy and larger financial system, courtesy of a March 21 commentary entitled “Debt and Taxes” that’s posted on his Euro Pacific Capital website:

The last few years have proven that there is no line Washington will not cross in order to keep bubbles from popping. Just 10 years ago many of the analysts now crowing about the perfect conditions would have been appalled by policies that have been implemented to create them. The Fed has held interest rates at zero for five consecutive years, it has purchased trillions of dollars of Treasury and mortgage-backed securities, and the Federal government has stimulated the economy through four consecutive trillion-dollar annual deficits. While these moves may once have been looked on as something shocking…now anything goes.

But the new monetary morality has nothing to do with virtue, and everything to do with necessity. It is no accident that the concept of “inflation” has experienced a dramatic makeover during the past few years. Traditionally, mainstream discussion treated inflation as a pestilence best vanquished by a strong economy and prudent bankers. Now it is widely seen as a pre-condition to economic health. Economists are making this bizarre argument not because it makes any sense, but because they have no other choice.

America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity. To do this you must convince people that inflation is a good thing…even while they instinctively prefer low prices to high. But rising asset prices do little to help the underlying economy. That is why we have been stuck in what some economists are calling a “jobless recovery.” The real reason it’s jobless is because it’s not a real recovery! So while the current booms in stocks and condominiums have been gifts to financial speculators and the corporate elite, average Americans can only watch from the sidewalks as the parade passes them by. That’s why sales of Mercedes and Maseratis are setting record highs while Fords and Chevrolets sit on showroom floors. Rising prices to do not create jobs, increase savings or expand production. Instead all we get is debt, which at some point in the future must be repaid

(Editor’s note: Bold added for emphasis)

“Which at some point in the future must be repaid”

Good luck trying to get your average American in 2014 to wrap their head around that crucial concept.

Once again, I agree with Schiff’s observation of what is going on all around us.

“Illusion of prosperity” is a fine choice of words here, and makes sense that I find a fine economic blog by the same name good reading.

As certain as the “Big One” will eventually hit California, so must our nation’s “financial reckoning day” arrive for all this debt we’ve accrued for some short-term “prosperity.”

You can read Schiff’s entire commentary on the Euro Pacific Capital website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago Wakes To Proposed Property Tax Hike On April Fool’s Day

Many Chicagoans probably wish what’s being widely-reported in the local news this morning about a proposed property tax hike is just a silly April Fool’s joke.

It’s not.

Fran Spielman wrote on the Chicago Sun-Times website last night:

Chicago property owners will face $250 million in property tax increases over five years while city employees make increased pension contributions that will cost them at least $300 more a year, under landmark reforms unveiled Monday…

The new revenue the mayor had promised only after pension reform will come in the form of $50 million property tax increases for five straight years, beginning next year and continuing through 2019.

Top mayoral aides estimate that would cost the owner of a home valued at $250,000 with an annual property tax bill of $4,000 roughly $58 more or $290 over the five-year period. That’s on top of expected increases for the Chicago Board of Education and Chicago Park District…

(Editor’s note: Bold added for emphasis)

A couple of thoughts here:

First off, is anyone really surprised this is happening?

Regular readers of this blog shouldn’t be.

Higher fees, fines, and taxes. Less government services.

I’ve been squawking this for quite some time now.


“Black Dynamite- Who saw that coming?”
YouTube Video

Second, a $250,000 home? When discussing a Chicago Board of Education property tax hike last August, I blogged:

$230,000? You’d be hard-pressed to find a home for that little money in my former stomping grounds on the Northwest Side.

The same holds true for a $250,000 one (especially if it’s a property big enough for a family and doesn’t require a ton of work).

Which means many of my old neighbors will be coughing up significantly more than just $58 annually/$290 over five years as a result of this proposed hike.

And they already pay a big chunk of change to the City’s coffers.

Third, Spielman added last night:

The bottom line, according to Emanuel, is a plan that spreads the burden between employees, retirees and homeowners without raising property taxes so high that it triggers a mass exodus to the suburbs…

“Mass” being the key word here, because an exodus has already started. Former Chicago residents who have awakened to the “writing on the wall” are moving to the suburbs (yours truly included), leaving Cook County, and departing the state.

The push to make “temporary” personal and corporate income tax hikes permanent and the pursuit of class warfare in the form of a proposed millionaire tax hike by the ruling political party in the city, county, and state certainly don’t help the situation either.

Fourth, I can’t stand when tax hikes are proposed despite the lack of significant belt-tightening. Think the City of Chicago is as lean-and-mean as it possibly can be with its operations and set-up?

As long as 50 aldermanic wards exist, I’d argue no.

Fifth, as it stands right now, there’s still a state-required $600 million contribution due next year from the City to stabilize police and fire pension funds that this proposed property tax hike doesn’t address and has to be dealt with. Hal Dardick an Bill Ruthhart reported on the Chicago Tribune website this morning:

But the proposal the mayor and his top aides outlined late Monday would not address huge pension shortfalls for Chicago police, firefighters and teachers. Nor would it deal with the city’s most immediate, pressing financial problem: a state requirement to pay a whopping $600 million more toward police and fire pensions next year, a provision that could lead to a combination of tax increases, service cuts and borrowing

(Editor’s note: Bold added for emphasis)

You read right. Possibly more “tax increases, service cuts and borrowing” coming down the line shortly for Chicago residents.

Stay tuned…

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Spielman, Fran. “Pension deal pinches city workers and taxpayers.” Chicago Sun-Times. 31 Mar. 2014. (http://politics.suntimes.com/article/chicago/exclusive-pension-deal-pinches-city-workers-and-taxpayers/mon-03312014-821pm). 1 Apr. 2014.

Dardick, Hal and Ruthhart, Bill. “Emanuel’s pension fix: Shrink benefits, raise taxes.” Chicago Tribune. 1 Apr. 2014. (http://www.chicagotribune.com/news/local/ct-rahm-emanuel-pension-property-tax-increase-met–20140401,0,1662095,full.story). 1 Apr. 2014.

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BIS: Global Debt Markets Grow To Estimated $100 Trillion In 2013, Up From $70 Trillion In 2007

Last night, I read about global debt markets hitting the $100 trillion-mark.

One word came to my mind at that moment:

Unsustainable.

Branimir Gruić and Andreas Schrimpf wrote “Cross-border investments in global debt markets since the crisis” in the latest BIS Quarterly Review- a report from the Bank of International Settlements (the central bank of central banks). From the publication released Sunday:

Global debt markets have grown to an estimated $100 trillion (in amounts outstanding) in mid-2013 (Graph C, left-hand panel), up from $70 trillion in mid-2007. Growth has been uneven across the main market segments. Active issuance by governments and non-financial corporations has lifted the share of domestically issued bonds, whereas more restrained activity by financial institutions has held back international issuance (Graph C, left-hand panel).

Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers (Graph C, left-hand panel). They mostly issue debt in domestic markets, where amounts outstanding reached $43 trillion in June 2013, about 80% higher than in mid-2007 (as indicated by the yellow area in Graph C, left-hand panel)…

(Editor’s note: Italics added for emphasis)

“Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers”

Gruić and Schrimpf are correct- I’m not surprised.

And regular Survival And Prosperity readers shouldn’t be either, as warnings about reduced government services and new/higher taxes and fees (to deal with all this new debt) have been issued time and time again.

You can read the entire BIS report here (page 22 of the .pdf file/page 18 of the publication contains Gruić and Schrimpf’s findings).

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago Borrows $1.9 Billion, Piling On More Debt ‘For The Children’

“Mayor Rahm Emanuel closed the books on 2011 with $310 million in cash on hand, $167 million more than the year before, but added $465 million to the mountain of debt piled on Chicago taxpayers, year-end audits show…

The new round of borrowing brings Chicago’s total long-term debt to just over $27 billion. That’s $10,000 for every one of the city’s nearly 2.7 million residents. More than a decade ago, the debt load was $9.6 billion or $3,338-per-resident.”

-Chicago Sun-Times website, July 22, 2012

“Mayor Rahm Emanuel closed the books on 2012 with $33.4 million in unallocated cash on hand — down from $167 million the year before — while adding to the mountain of debt piled on Chicago taxpayers, year-end audits show…

The new round of borrowing brings Chicago’s total long-term debt to nearly $29 billion. That’s $10,780 for every one of the city’s nearly 2.69 million residents.”

-Chicago Sun-Times website, July 26, 2013

Chicago keeps piling on massive amounts of debt. From Fran Spielman yesterday on the Chicago Sun-Times website:

Chicago will test the bond market for the first time since its bond rating dropped three notches, thanks to $1.9 billion in borrowings added Monday to the mountain of debt piled on Chicago taxpayers.

The City Council’s Finance Committee authorized two massive borrowings: a $900 million general obligation bond issue to refinance old debt, pay for equipment and capital projects and bankroll $100 million for legal settlements incurred last year and a $1 billion borrowing for Midway Airport.

The Finance Committee also agreed to double — from $500 million to $1 billion — a so-called “commercial paper” program used to cover short-term borrowing between bond deals.

The general obligation bond issue includes $200 million in debt refinancing and $130 million in debt restructuring to “better align revenues with our obligations,” as [Chief Financial Officer Lois] Scott put it.

The so-called “scoop-and-toss” technique will stave off even higher taxes and fees, but it will saddle Chicagoans with another decade of debt that should be paid off today

(Editor’s note: Italics added for emphasis)

Mayor Rahm Emanuel’s worn-out line “it’s for the children” comes to mind here.

As well as that saying “you can pay now or pay later.”

Which is what Chicagoans will eventually be forced to do when the city’s “financial reckoning day” arrives.

The Chicago Tribune did a pretty good job illustrating just how serious the city’s debt crisis is becoming. Hal Dardick, Heather Gillers, and Jason Grotto reported on the Tribune website yesterday:

In a move that will add to the city’s mountain of debt, Mayor Rahm Emanuel won support Monday from the City Council’s Finance Committee to issue up to $900 million in bonds backed by property taxes.

It’s the largest request put forth during Emanuel’s tenure and comes at a time when Chicago already has about $7 billion in outstanding general obligation debt, more per capita than bankrupt Detroit or any of the 10 biggest U.S. cities except New York

Monday, aldermen asked few questions about the borrowing as the ordinance authorizing the debt sailed through the committee with virtually no debate.

“It raises questions of how much City Council members understand the financial condition of the city and what the plan going forward will be to meet the debt,” said Laurence Msall, president of the nonpartisan Civic Federation budget watchdog group…

The amount of borrowing sought by Emanuel suggests his administration continues to need huge loans to run the city

(Editor’s note: Italics added for emphasis)

I can’t begin to tell you how depressing it is watching “The Machine” steadily bring the “City of Broad Shoulders” down to its knees. But what does City Hall care? More than likely they’ll have moved on to comfortable retirements or “bigger and better things” by the time the city implodes as a result of “scooping and tossing.”

Ubi Est Mea? (Pulitzer prize-winning newspaper columnist Mike Royko’s suggested Chicago city motto of “Where’s Mine?”)

How about “Not On My Watch,” all things considered?

By Christopher E. Hill
Survival And Prosperity (survivalandprosperity.com)

Sources:

Spielman, Fran. “City to borrow $1.9 billion in first test since rating downgrade.” Chicago Sun-Times. 3 Feb. 2014. (http://www.suntimes.com/news/metro/25360629-418/city-to-borrow-19-billion-in-first-test-since-rating-downgrade.html). 4 Feb. 2014.

Dardick, Hal, Gillers, Heather, and Grotto, Jason. “Mayor seeks to borrow up to $900 million more.” Chicago Tribune. 3 Feb. 2014. (http://articles.chicagotribune.com/2014-02-03/news/ct-met-bonds-new-chicago-borrowing-20140204_1_tax-increases-city-leaders-finance-committee). 4 Feb. 2014.

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Chicago’s Debt Crisis Finally Gets Major Exposure

Early Sunday morning, I mozied on down to the end of my driveway to pick up my Chicago Tribune. After eating a little breakfast, I busted out the paper and saw the following headline in big, bold letters on the front page:

City’s debt splurge: ‘It’s like a cancer’

Well, it’s about time Chicago’s debt crisis gets major exposure in a mainstream media outlet.

Of course, Survival And Prosperity readers have known about this growing debacle for some time now (a big hat tip goes out to Fran Spielman over at the Chicago Sun-Times). Back in July 2012 I noted Chicago’s long-term debt was over $27 billion. This July, I blogged that this figure was now up to nearly $29 billion, or $10,780 for every city resident ($780 more per Chicagoan in just one year). So the debt splurge wasn’t just a feature of the Daley regime.

Regarding that Tribune piece, Patricia Callahan, Heather Gillers, and Jason Grotto reported:

A reckless pattern of borrowing by city leaders has undermined Chicago’s future by ignoring the most basic tenets of municipal finance and piling billions of dollars of debt onto the shoulders of future generations, a Tribune investigation has found.

Chicago officials abused a powerful financial tool intended to build for the future — issuance of bonds backed by property taxes — as they spent nearly $10 billion in 13 years with few restrictions and virtually no oversight.

The Tribune’s unprecedented examination of city finances reveals that Chicago built mountains of long-term debt from thousands of problematic short-term purchases including software that was soon obsolete, spare parts for vehicles and items you might find on a weekend shopping list: trash bins, flowers, even bags for dog waste…

When the Tribune analyzed $9.8 billion in proceeds from general obligation bonds issued from 2000 to 2012, it found that nearly half of the money went to paper over growing budget problems.

(Editor’s note: Italics added for emphasis)

Any doubts I still may have had about Chicago being in serious financial trouble were dispelled when I read that last bit about half the bond money going to “paper over growing budget problems.”

As to the culprits in this financial caper? Callahan, Gillers, and Grotto added:

Most of Chicago’s debt woes can be traced to the long reign of former Mayor Richard M. Daley, but the borrowing he relied on so heavily has continued under Rahm Emanuel as his administration gropes for ways to deal with the financial problems it inherited…

There is no limit on the city’s general obligation debt, and the sole check and balance is the City Council, a body that rarely pushes back on major mayoral decisions. Since 2007, aldermen have authorized $7.6 billion in general obligation bond issuances without a single dissenting vote. And each year they get millions in bond proceeds to dole out for projects in their wards.

While it would be easy to blame Richie Daley, Rahm Emanuel, and the alderpeople for this big mess, at the end of the day, many Chicagoans need only look into the mirror to see who’s really to blame for letting the city’s finances get this far out of hand.

As to what “Windy City” residents might want to do now seeing that “a reckless pattern of borrowing by city leaders has undermined Chicago’s future”? Perhaps start looking at ways to mitigate the current and coming damage- something I’ll be talking more about in the months to come.

A good place to begin would be read the article to get a sense of how bad the problem really is, which can be found on the Chicago Tribune website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Jim Rogers: ‘Possible That Gold Will Go To Between 900 and 1,000’

On September 18, investor, author, and financial commentator Jim Rogers chatted with host Lauren Lyster of Yahoo! Finance’s The Daily Ticker. Gold was one of the topics they discussed. From their exchange:

LYSTER: What about gold? Because you were dead on. You said gold could go to 1,200, gold could go to 1,100, it’s a 12-year bull market, that’s not normal. It did exactly that. It went to about 1,200. Now it’s above 13. Where do you think it goes though? Because you also said that it really needed to shake out all the faithful diehards. That it can go as low as 900- a 50 percent correction wouldn’t bee abnormal. So do you think gold still has a lot lower to go?
ROGERS: Well, I’m delighted you remember. My goodness. Wow, I’m very impressed. Yes, I have not bought gold- yet. I mean, I bought a little bit when it was at 1,200, in case. But, in my view, it’s likely, it’s probable, it’s even, well let’s say, possible that gold will go to between 900 and 1,000. If it does, if it does, I hope I’m smart enough to buy a lot more.

Lyster went on to say:

A lot of the bearish predictions that had people buying gold haven’t played out and don’t seem to be on the horizon anymore.

Regrettably, it sounds like Lyster has been partaking in the Kool-Aid being doled out by the politicians and central bankers.

Based on a waffling “recovery” marked by a federal funds rate still near zero, years of trillion-dollar federal budget deficits, a $16.7 trillion federal borrowing limit being reached, significant part-time as opposed to full-time national job creation, an unemployment rate falling because Americans are giving up looking for work, and the Fed’s refusal to take away the punch bowl just yet and sustain the massive money printing going on, one could argue that gold’s fundamentals not only remain intact, but keep getting stronger.

“Bearish predictions… haven’t played out and don’t seem to be on the horizon anymore.” Hogwash. The threats to our economy and larger financial system that made themselves known during the “Panic of ’08 still linger on 5 years later and have never been resolved- only papered-over for the time being.


“Gold Rallies on Fed’s Taper Delay: Jim Rogers Forecasts a Drop to $900 Ahead”
Yahoo! Finance Video

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Moody’s Analytics: All U.S. States Except Delaware Have Escaped Recession Risk

Just when I thought I had read/seen it all today comes this from Lisa Lambert on the Reuters website late this afternoon:

All U.S. states except for Delaware have escaped the possibility of falling back into recession, as they reap the rewards of strong private-sector employment and a burgeoning energy sector, according to an analysis released on Tuesday.

Moody’s Analytics, which tracks state and metropolitan economies, added Illinois, Wisconsin and Alabama to its list of states in recovery. That left Delaware alone in its “at risk of recession” category.

Moody’s Analytics, a unit of Moody’s evaluates economics and financial risk around the world. A separate unit, the credit ratings agency Moody’s Investors Service, recently said the outlook for states is now stable, after five years of being negative.

With the U.S. economy being kept afloat by massive federal government intervention, trillion dollar budget deficits, an almost zero percent federal funds rate, attempted reinflating of the housing and financial markets, $85 billion worth of long-term bonds being purchased by the Fed each and every month, job creation dominated by part-time positions, and highly-questionable government reporting of economic data to boot, one could easily argue another recession- measured using “official” figures- is a real and constant threat to the United States.

After I read that recession assessment by Moody’s Analytics, the following sarcastic line from “Gunny” Highway (actor Clint Eastwood) in the 1986 film Heartbreak Ridge came to mind:

Well, I’ll sleep a lot better at night knowing that sir.

Have a good evening everyone.

Source:

Lambert, Lisa. “Recession risk gone in all U.S. states but 1: Moody’s Analytics.” Reuters. 10 Sep. 2013. (http://www.reuters.com/article/2013/09/10/us-usa-states-economies-idUSBRE9891BG20130910). 10 Sep. 2013.

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U.S. Treasury: Debt Limit Reached By Mid-October

U.S. Treasury Secretary Jacob Lew warned Congress yesterday that the United States will hit its $16.7 trillion debt ceiling in mid-October. Lew wrote in a letter addressed to Speaker of the House John Boehner:

I am writing to provide additional information regarding the Treasury Department’s ability to continue to finance the government, and the extraordinary measures we have undertaken in order to avoid default. On May 17, I wrote to inform you that the U.S. government has reached the statutory debt limit and had begun to implement extraordinary measures. As I stated in that letter, Congress should act as soon as possible to protect America’s good credit by extending normal borrowing authority well before any risk of default becomes imminent.

Based on our latest estimates, extraordinary measures are projected to be exhausted in the middle of October. At that point, the United States will have reached the limit of its borrowing authority, and Treasury would be left to fund the government with only the cash we have on hand on any given day. The cash balance at that time is currently forecasted to be approximately $50 billion…

You can read Secretary Lew’s entire letter on the Treasury Department’s website here (.pdf file).

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Moody’s Cuts Cook County Bond Rating, Outlook Negative

In the wake of significantly downgrading the City of Chicago’s credit rating, bond credit rating giant Moody’s Investor Service lowered Cook County’s bond rating a notch last Friday. In a news release from the Moody’s website right before the weekend:

New York, August 16, 2013 — Moody’s Investors Service has downgraded the rating on Cook County’s (IL) general obligation (GO) debt to A1 from Aa3, affecting $3.7 billion of general obligation debt. The outlook remains negative.

SUMMARY RATING RATIONALE

The downgrade of the GO rating reflects Cook County’s growing pension liabilities due to, in part, a statutory funding requirement that is not tied to the health of the County Employees’ and Officers’ Annuity and Benefit Fund of Cook County (the Fund), resulting in a growing disparity between the fund’s actuarially required contribution (ARC) and its actual employee and employer contributions. Additionally, approximately 50% of the county’s tax base includes the city of Chicago (GO rated A3/negative outlook), resulting in a significant overlapping long-term liability burden. These considerations are balanced by the county’s key credit strengths, including a large tax base that comprises the second most populous county in the nation, inclusive of numerous communities with strong demographic profiles; broad revenue raising flexibility inherent in the county’s home rule status; recent stabilization of financial operations across multiple funds; and a strong management team that continues to implement best practices across all lines of county business. Additionally, the A1 rating reflects the county’s demonstrated willingness to pursue pension reform.

The negative outlook reflects the formidable hurdles facing the county in its quest to pursue meaningful pension reform. Changes to the Fund, including employer contributions and benefits received by plan participants, must be enacted at the State of Illinois (GO rated A3/negative outlook) level. The General Assembly’s legislative paralysis to date with respect to enacting its own pension reforms may further delay the county’s attempt to present a reform package, despite having a significantly developed plan. Further, strong constitutional protections for pension benefits may result in a legal challenge that could further delay the implementation of reforms.

(Editor’s note: Italics added for emphasis)

According to Moody’s, Cook County now has “above-average creditworthiness relative to other US municipal or tax-exempt issuers or issues” as compared to “very strong creditworthiness” prior to the downgrade.

You can read the entire Moody’s news release on their website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

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Tuesday, August 20th, 2013 Bonds, Borrowing, Entitlements, Government, Retirement No Comments

Peter Schiff On GDP Calculation ‘Makeover,’ Delaying Our ‘Day Of Reckoning,’ And Gold Speculators

Lots of catching up going on around here today. I just got finished watching Peter Schiff’s latest entry on The Schiff Report YouTube video blog. The CEO/Chief Global Strategist of Euro Pacific Capital zeroed-in on the “makeover” in calculating U.S. gross domestic product, delaying our “financial reckoning day,” and the situation small speculators may find themselves in after helping fuel gold’s price drop the other week. Regarding GDP, Schiff pointed out the following in yesterday’s video blog post:

When the government gets around to delivering the news for the second quarter, the U.S. economy is going to be quite a bit larger than it was during the fourth quarter. Now, it’s not going to be because we’re actually more productive, it’s because the government is going to launch a brand new methodology for computing the GDP. They’re going to change the way they’ve been doing it all these years. And they’re going to start to include a bunch of things that in the past, they never included. They’re going to include things that no other country includes when they calculate their GDP. And as a result of this makeover, these brand new additions, I think instantaneously the U.S. economy is going to be 3 percent larger. That’s a big number. It’s like 4 or 500 billion dollars of GDP is going to be conjured out of thin air just based on the change in the methodology for computating GDP.

You know, this is what the government does. They change the way they compute statistics. Unemployment’s too high? Okay, we’ll calculate it another way. Now it’s not as high. Inflation’s too high? Wait a minute, let’s find another way to calculate the inflation rate. Oh look, we’ve solved the inflation problem- there’s not that much inflation.

Now, the government wants the economy to appear bigger. Why? Well, because it makes the debt-to-GDP look smaller. A lot of people are talking about debt-to-GDP now. Well, if they can make the GDP larger by figuring out another way to calculate it, well now they can make that ratio appear better.

Also, people are talking about government spending as a share of GDP. Okay, let’s make the GDP larger, and that means that government spending has now come down as a share of this larger number.

Schiff, who correctly predicted the U.S. housing bust and “Panic of ’08,” had this to say about the coming U.S. financial crash:

The fact of the matter is, governments are borrowing too much, they’re printing too much, they’re spending too much, and it’s all in a vain attempt to try to artificially stimulate an economy that’s been overstimulated, and to delay the “day of reckoning.” And the problem is, the longer they delay it, the more we have to reckon with. And, ultimately, we’ve going to have to pay a huge price for the fact that we didn’t deal with these problems sooner, rather than later.


“Slow ‘growth’,GDP makeover, Keynesians demand more debt and inflation”
YouTube Video

Finally, Schiff, who’s also the CEO of Euro Pacific Precious Metals, talked about gold’s recent price drop, who he thought was behind it, and what may be in store for them. From the video post:

I think the major selling in the metals market has come from the small speculator that trades on the futures market, that trades on the ETF. That’s where all the selling has been. The small speculators. I don’t think the larger investors have cashed in. They’re probably holding on. And the real buyers, the buyers in the physical market- who are not just trying to jump on a moving train to try and catch a small move because they want to get in on something that’s going up- the physical demand has been ongoing and consistent for years. But you have had some of the “Johnny Come Lately” hot money among smaller speculators. They’ve jumped on, they’re the ones that have sold, they cashed out. In fact, I think you have a lot of small speculators that are now short gold, that sold into the lows, and that are holding onto these positions with losses. And we’ll see how long they can hold those losses as the price moves higher and we turn up the heat. I think a lot of those people that were quick to short the market are going to end up covering at much higher prices.

Good insights as usual from this “crash prophet.”

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)

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