David M. Walker

SP Intel Report- November 10, 2015

Chicagoland

Cook County Ammo Tax Ordinance To Be Heard Friday, November 13

Within yesterday’s SP Intel Report, I mentioned that Cook County President Toni Preckwinkle is proposing a tax on ammunition sales in the county. The National Rifle Association’s Institute for Legislative Action reported on its website Monday:

Cook County Board of Commissioners has proposed Ordinance 15-6469, a proposal to impose a tax on ammunition, similar to proposals reported on in the past. This ordinance will be heard on Friday, November 13, at 1:00 p.m., by the Cook County Board of Commissioners Finance Committee.

This proposal would impose a $0.05/cartridge tax on all centerfire ammunition and a $0.01/cartridge tax on all rimfire ammunition, and would therefore penalize law-abiding gun owners for exercising their fundamental right to keep and bear arms. By definition, holders of a valid FOID card are the only persons legally permitted to purchase ammunition in Illinois, and therefore are the only persons subject to this tax – not the criminals responsible for the violence on the streets of Chicago…

That last bit sound familiar to readers of yesterday’s Intel Report? You can read the entire NRA-ILA piece on their website here.

National

Wisconsin Democrats Push To Ban ‘Semiautomatic Assault Weapons’

The push for more gun “control” is alive and well north of the Illinois state line too. From a press release published on the Urban Milwaukee website last Wednesday by Wisconsin State Representative Lisa Subeck (D-Madison):

MADISON –Today, Representative Subeck (D-Madison), along with Representatives Terese Berceau, Melissa Sargent and Chris Taylor, circulated an Assembly bill that would ban the transportation, purchase, possession, or transfer of semiautomatic assault weapons in Wisconsin.

“Our nation has watched as community after community has had to confront the tragedies that occur when weapons designed to kill large numbers of people quickly get into the hands of a dangerous person,” said Representative Lisa Subeck. “No Wisconsin community should ever have to face such a tragedy at the hands of someone armed with a semiautomatic assault weapon.”

Semiautomatic assault weapons are a class of firearms that are designed to kill large numbers of people quickly. They have been used in many high-profile shooting incidents, including the 2012 mass shooting at Sandy Hook Elementary School in Newtown, Connecticut; the 2012 Aurora, Colorado movie theater shooting; the 1999 Columbine High School massacre in that state; and the 1993 office shooting at the 101 California Street building in San Francisco.

“I can conceive of no legitimate reason that any citizen should need to own or use a semiautomatic assault weapon,” said Rep. Subeck…

(Editor’s note: Bold added for emphasis)

“Semiautomatic assault weapons.” Haven’t heard of that one before. The word wankers hard at work again. You know, on behalf of gun “safety.” You can read the entire press release on the Urban Milwaukee website here.

Former U.S. Comptroller General David M. Walker Warns Real U.S. Debt Closer To $65 Trillion Than $18 Trillion

It’s been some time since I’ve blogged about former Comptroller General of the United States David M. Walker. Appointed by President Clinton, Walker served as Comptroller General and head of the Government Accountability Office from 1998 to 2008. While at the GAO, Walker warned Americans about the nation’s long-term fiscal challenges as part of the “Fiscal Wake-Up Tour.” Frustrated by Washington’s refusal to confront these challenges, Walker left the public sector on March 12, 2008. I noticed Mr. Walker was back in the headlines this past weekend. Bradford Richardson reported on The Hill website Saturday:

The former U.S. comptroller general says the real U.S. debt is closer to about $65 trillion than the oft-cited figure of $18 trillion.

Dave Walker, who headed the Government Accountability Office (GAO) under Presidents Bill Clinton and George W. Bush, said when you add up all of the nation’s unfunded liabilities, the national debt is more than three times the number generally advertised.

“If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree healthcare, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” Walker told host John Catsimatidis on “The Cats Roundtable” on New York’s AM-970 in an interview airing Sunday…

(Editor’s note: Bold added for emphasis)

Whenever the national debt is brought up, I think about all those Pollyannas who go around saying the debt doesn’t matter. Give it a few more years when Washington and the Fed run out of road to kick the can. Then hold on for dear life

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

Sources:

Richardson, Bradford. “Ex-GAO head: US debt is three times more than you think.” The Hill. 7 Nov. 2015. (http://thehill.com/blogs/blog-briefing-room/news/259476-ex-gao-head-us-debt-is-three-times-more-than-you-think). 9 Nov. 2015.

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The Crash Prophets Revisited, Part 3

(Editor’s note: Part 1 located here; Part 2 located here)

Concluding the three-part series of posts entitled, “The Crash Prophets Revisited,” back on June 21, 2007, I discussed what past and present (at that time) government and Federal Reserve officials were predicting what the future had in store for the U.S. economy. That summer, former Treasury Secretary Robert Rubin was worried about unsound fiscal conditions and the negative impact it might have on the U.S. dollar, U.S. Comptroller General and head of the U.S. General Accountability Office (GAO) David M. Walker was touring the country warning about the “fiscal black hole” Washington had dug itself through reckless borrowing from overseas lenders, and how it was going to get a lot worse from a fast-approaching “demographic tsunami” of retiring Baby Boomers. Finally, former Federal Reserve Chairman Paul Volcker was predicting that the United States’ dependence on foreign money raised the risk of a crisis in the dollar as soon as the next two and a half years.

Almost four years later, all three continue to worry about the direction the United States is heading.

Robert Rubin

Jane L. Levere wrote on the Daily Finance website about President Clinton’s Treasury Secretary and current co-chair of the Council on Foreign Relations Robert Rubin on March 17. Rubin had just participated in a public conversation on the U.S. economy at New York City’s 92nd Street Y. From that piece:

“If you compare where we were to a year ago, we really are in much better condition,” says Rubin. “There are indeed a goodly number of positives.” But there are also, he says, “serious headwinds” in the form of possible impediments to growth. Rubin says these obstacles include “our long-term fiscal trajectory (which) is horrendous, unsustainable and dangerous” and undermines confidence — as well as state and local government deficits “that are going to be have to be closed by their constitutions.” Contributing to those figures, he says, are rising oil prices and high unemployment — which Rubin estimates at 16%, if temporary workers and people who have entirely dropped out of the workforce are included.

“The probabilities are very unclear,” he says. “While the most likely outlook may be the more positive forecast that many forecasters now have, there is a very real chance that what actually happens could fall short of that.

Rubin says that, as an investor, he is concerned about “low-probability events which, if they occur, could have huge consequences” — events such as a resurgence of terrorism, possibly in a politically unstable and nuclear armed Pakistan. He also warns the U.S. fiscal deficit could cause a crisis in the bond market, that in turn could have “severe effects on our economy.”

“It’s not inconceivable that something goes wrong in Europe,” Rubin notes. Adding that if default happens there, “that could have ramifications elsewhere.” But he admits the future is far from clear: “This is the most uncertain and complex time in my adult lifetime in trying to make judgments about what is going to happen either in the short term or the long term.”

(Editor’s note: Italics added for emphasis)

Levere noted the former co-chairman of Goldman Sachs’ longer-term outlook for the country. She wrote:

Looking at the longer term, Rubin says although the U.S. has “a dynamic society” and “tremendous comparative advantage in the global economy…the real question comes down to our political system and whether it will meet its multiple challenges, most particularly putting our fiscal house back in order… and creating the resources necessary for the public investment that is requisite for competitiveness and growth.”

David M. Walker

I’ve talked about the former Comptroller General and head of the Government Accountability Office from 1998 to 2008 David M. Walker before. These days, Walker serves as the CEO of the Comeback America Initiative (CAI), a Bridgeport, Connecticut-based project that seeks to “promote fiscal responsibility and sustainability by engaging the public and assisting key policymakers on a non-partisan basis in order to achieve solutions to America’s fiscal imbalances.” CAI hopes to “keep America great and the American Dream alive for future generations.” Discussing the prospect of raising the federal debt ceiling, Walker wrote in the Connecticut Post last Friday:

In essence, raising the debt ceiling is simply recognizing the federal government’s fiscally irresponsible practices of the past. But while failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation’s fiscal, economic, unemployment and other challenges.

The recent decision by Standard & Poor’s, one of the leading credit-rating agencies, to downgrade the long-term outlook on U.S. debt is yet another market signal that elected officials must begin to work together to put our finances in order before the markets force it to. Other recent signals have included the reduced appetite of foreign investors for longer-term U.S. debt and the decision of PIMCO, a global investment firm, to divest its U.S. debt holdings.

In fact, the only player with any real appetite for longer-term U.S. debt in recent months has been the Federal Reserve — and such involvement on their part essentially amounts to government self-dealing. Such self-dealing serves to help the economy in the short-term while increasing longer-term risks and potentially delaying needed fiscal reforms.

In order to begin to restore fiscal sanity, Congress should increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year.

One possible step could include agreeing on a set of statutory budget controls that would come into effect in fiscal 2013. Such controls should include specific annual debt/GDP targets with automatic spending cuts and temporary revenue increases in the event the annual target is not met. In my view, a ratio of three parts spending cuts, excluding interest savings, to one part revenue would make sense.

This debt/GDP target concept, which I have been advocating both publicly and privately in recent months, gained additional momentum last week when President Obama endorsed it in his April 13 fiscal speech. It also seems to be gaining some momentum in Congress. It just may be a nonpartisan approach that can gain bipartisan support in order to help ensure that our elected officials do not play “chicken” with the nation’s debt ceiling limit as they did in resolving federal funding levels for fiscal 2011. After all, playing “chicken” with the debt ceiling would be like playing with a tactical nuclear weapon. If it explodes, it would come with a huge amount of collateral damage, including harming U.S. credibility.

(Editor’s note: Italics added for emphasis)

Failure to make progress on the debt situation soon could lead to a major crisis. Walker told CNBC’s Squawk Box on March 24:

I think we’re going to have an adult conversation. We just need to have it sooner rather than later before we have our own U.S. debt crisis. You know, a U.S. debt crisis could come within the next two to three years. We have huge interest rate risk. We have the lowest average maturity of any sovereign nation or major nation on debt. We have historically-low interest rates. We’re adding debt at record rates. We have to rollover a great amount each year. Our largest holder of our debt is the Federal Reserve. I mean, that’s not an arm’s length transaction. And QE2 is supposed to expire on June 30. Wake up Washington- we’ve got a problem. It’s time to come to work.

Paul Volcker

Maggie Caldwell of the Wilton Bulletin (Connecticut) recently reported on former Federal Reserve Chairman Paul Volcker’s visit to Stamford, Connecticut, on April 12. Volcker spoke to the local business community about the state of the economy and where it might be headed. From her April 22 article:

Faced with the worst economic downturn since the Great Depression, the U.S. economy traditionally bounces back from recession periods with gains of 4% to 6% in a quarter. Not so in this case, Mr. Volcker said, adding the economy is making a labored crawl to approach 2% to 3% growth, what he termed a “slog.”

So what are the prospects for a real pick-up in the economy?

It won’t come out of consumption and probably not out of manufacturing, though there has been a rise in productivity in the latter, he said. The problem is manufacturing represents an “increasingly smaller proportion of the economy… not enough by itself to carry us carefully to prosperity and low unemployment,” Mr. Volcker explained.

The recently retired chairman of President Obama’s Economic Recovery Advisory Board voiced his concerns about the U.S. banking system and the threat it poses to the global financial system. Caldwell wrote:

With the breakdown in the banking system followed by the subsequent federal bank bailout, Mr. Volcker said higher capital standards must be placed on banks and other financial institutions to protect the system and ultimately the taxpayer. The old problem of “too big to fail,” where the system becomes unstable and the government steps in to save it, is one that must be addressed, he said…

While splitting up the banks may not be feasible, Mr. Volcker argues that regulations must be placed on these behemoth financial institutions to protect the global financial system. Any bank that is FDIC-insured, meaning it gets subsidized by the federal government, should not be making risky deals with great amounts of assets. It’s just too big a gamble, he said, leaving the whole system in jeopardy.

“[These banks] should not be involved in risky business. Don’t do it with the protected sector where the government is indirectly or directly subsidizing the institution,” he said. Banks should instead maintain their focus on customer needs, economic needs and the constructive role of banking in the financial system, not speculative activities.

“I think it is destructive mixing up those types of activities with what we used to think of as ordinary banking,” he said. Enforcing these types of resolutions, however, must be accepted worldwide to keep banks from simply relocating to avoid policing. “It won’t be enforced if other countries don’t follow,” he said.

Finally, Volcker sees a redistribution of economic power in the coming years. Caldwell added:

The United States still boasts the world’s largest economy. However, China —and the rest of the world — is quickly catching up.

Mr. Volcker said the world he grew up in was vastly different than the one we find ourselves in today. After World War II, “everybody wanted dollars, everybody wanted help from the U.S. They respected us for our financial system and our governing system,” he said. There was a recognition of American leadership. For 100 years, the United States was the largest manufacturer in the world. Now China has eclipsed that number and its economy is growing at a staggering rate of 7% to 11% per year. In two to three decades, Mr. Volcker said, China’s economy will be as big as the United States’.

“Not per capita, but the economic force in the world will be quite different,” he said, especially coupled with the sheer size of the population of these emerging countries, three billion to our one billion in the developed world.

In summary, back in June 2007 I identified a number of influential individuals from the worlds of finance and government who predicted financial turmoil ahead for the United States. Revisiting these “crash prophets” almost four years later reveals that substantial concerns remain for Warren Buffett, Jeremy Grantham, Jim Rogers, Robert Rubin, Gary Shilling, George Soros, Paul Volcker, and David M. Walker over the nation’s economic well-being. Especially in the future.

Uncertain times, indeed.

Sources:

Levere, Jane L. “Rubin, Paulson Give Mixed Forecast on U.S. & Global Economic Recovery.” Daily Finance. 17 Mar. 2011. (http://www.dailyfinance.com/2011/03/17/rubin-paulson-give-mixed-forecast-on-u-s-and-international-econo/) 25 Apr. 2011.

Walker, David M. “Raise debt ceiling – then clamp down.” Connecticut Post. 22 Apr. 2011. (http://www.ctpost.com/default/article/Raise-debt-ceiling-then-clamp-down-1348912.php). 25 Apr. 2011.

Caldwell, Maggie. “Volcker talks about the economy.” Wilton Bulletin. 22 Apr. 2011. (http://www.acorn-online.com/joomla15/wiltonbulletin/news/localnews/91880-volcker-talks-about-the-economy.html). 25 Apr. 2011.

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The Crash Prophets

Vice President Dick Cheney says that his boss, President George W. Bush, has no need to apologize to the American people for not doing more to head off the financial calamity, saying no one saw the crisis coming.

During an interview Thursday with The Associated Press in his West Wing office, Cheney defended the administration’s performance on an economy that is growing weaker daily and which recently collapsed in spectacular fashion. Cheney said that “nobody anywhere was smart enough to figure it out.”

-Associated Press, January 8, 2009

Crash Prophets
June 14, 2007

Yesterday I read an article on MarketWatch that I want to share with you. Mutual funds columnist Paul Farrell wrote “‘Pop!’ Bubbles are great for America!” in response to author Daniel Gross’ new book Pop!: Why Bubbles Are Great For The Economy. In all fairness, I haven’t had a chance to read the book yet. But from what I’ve heard so far, Gross argues that economic bubbles and their subsequent popping are not to be feared, as innovation and infrastructure are utilized in the bubble’s aftermath to spur new economic growth. Rather than placing a positive spin on this “creative destruction,” Farrell sympathizes with the Main Street investors squashed by the popping of these bubbles. More importantly, he points out several prominent market watchers who are warning us that we are in the midst of economic bubbles today.

Richard Bookstaber, a risk manager and derivatives designer, played a role in the 1987 Wall Street crash and 1998 LTCM collapse. In his new book, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation, he says, “The financial markets that we have constructed have become so complex. And the speed of transactions so fast that apparently isolated actions and even minor events can have catastrophic consequences.” In the Wall Street Journal on May 18, Bookstaber warned, “The odds are pretty high that we’ll see other dislocations that match the type of turmoil we saw with the crash in 1987 and with the LTCM crisis- Any one derivative, with some exceptions, may be easy to track. But by the time you layer a lot of them one on top of the other, it becomes increasingly complex, so a small, unexpected event can propagate in surprising and nonlinear ways — and there’s no way to anticipate all these possible events.”

Peter Bernstein, a Wall Street legend who encouraged Bookstaber to write his book, is also deeply worried about the threat posed by derivatives. Bernstein, author of the just-released Capital Ideas Evolving and 1992’s Capital Ideas, fears derivatives because of the number of inexperienced investors (speculators) utilizing them. Farrell adds, “Meanwhile, the irrational exuberance of all the inexperienced masses continues blowing the bubble while “playing” with $370 trillion in derivatives worldwide.”

Legendary value investor Jeremy Grantham, chairman of the global investment management firm Grantham Mayo Van Otterloo (GMO), said in a recent letter to shareholders we are now witnessing the first global bubble in history, covering all asset classes. “From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!” Grantham adds, “Everyone, everywhere is reinforcing one another. Wherever you travel you will hear it confirmed that ‘they don’t make any more land,’ and that “with these growth rates and low interest rates, equity markets must keep rising,’ and ‘private equity will continue to drive the markets.’”

Finally, economist Gary Shilling says the United States is fast approaching a financial storm in his INSIGHT newsletter. He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces, according to Farrell, are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst. But like Bernstein, Bookstaber and Grantham, he also feels the “speculative excesses” of private equity deals may preempt the subprime blowup. In addition, Bookstaber fears that financial derivatives and hedge funds will prick the bubbles. Regardless, the most important thing to realize is that a number of threats exist simultaneously, thereby increasing the odds for a major financial crisis in the United States and beyond.

To be continued…

Crash Prophets, Part 2
June 15, 2007

In yesterday’s blog post, I talked about how some market watchers, specifically Richard Bookstaber, Peter Bernstein, Jeremy Grantham, and Gary Shilling, are warning of a fast-approaching U.S. financial crisis. Continuing the theme of “crash prophets,” today’s post focuses on legendary investors George Soros, Warren Buffett, and Jim Rogers, and what each is saying about the future of the U.S. economy.

George Soros is a Hungarian-born billionaire investor, philanthropist and author. The American businessman is known as “The Man Who Broke the Bank of England” as he earned $1.1 billion after speculating on the British pound in 1992, believing it was overvalued. He is also recognized for his involvement with the Quantum Fund, one of the most successful investment funds ever with an average annual return of 31% throughout its 30-year history. Back in January 2006, George Soros told an audience in Singapore that, “The soft landing (for the U.S. economy) will turn into a hard landing. That’s why I expect the recession to occur in 2007, not 2006.” Soros explained that a slowing U.S. housing market would be the catalyst for a U.S. recession in 2007. Back on June 2, 2007, AME Info quoted Soros as saying, “I believe the global economy has been sustained by a housing boom that took on the characteristics of a bubble,” and he cautioned, “I expect an initial soft landing to turn into a hard one when the slowdown does not end.” On the U.S. and global economy, “A slowdown in the United States will be transmitted to the rest of the world via a weaker dollar. That is why I expect a worldwide slowdown starting in 2007.” Finally, Mr. Soros stated that, “The savings of the world are sucked up into the center to finance over consumption by the richest and largest country, the United States. This cannot continue indefinitely and when it stops the global economy will suffer from a deficiency of demand.”

Warren Buffett, “The Oracle of Omaha,” is a famous investor, head of Berkshire Hathaway, and also the world’s second richest man. On October 26, 2003, Warren Buffet wrote a piece for Fortune entitled “Why I’m not buying the U.S. dollar.” Although a little dated, this article, and Buffett’s subsequent bet against the dollar, gives us insight as to where Mr. Buffett thinks the U.S. dollar and economy are going. Buffett said, “I started way back in 1987 to publicly worry about our mounting trade deficits — and, as you know, we’ve not only survived but also thrived. So on the trade front, score at least one “wolf” for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway’s money.” Regarding his actions on the U.S. dollar, he explains, “And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country’s “net worth,” so to speak, is now being transferred abroad at an alarming rate.” On the United States having avoided a financial crisis so far, Buffett says, “We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that’s the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades. The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary — and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card’s credit line is not limitless.” Finally, Mr. Buffett closes with a warning to all those who think the trade deficit is just another obstacle that can be overcome. “We still have a truly remarkable country and economy. But I believe that in the trade deficit we also have a problem that is going to test all of our abilities to find a solution. A gently declining dollar will not provide the answer. True, it would reduce our trade deficit to a degree, but not by enough to halt the outflow of our country’s net worth and the resulting growth in our investment-income deficit.”

Jim Rogers is a legendary commodities trader who picked the bottom of the commodities bull market in 1999. He is also one of the co-founders of the Quantum Fund, along with George Soros. Of the three investors profiled, Rogers is the most vocal regarding the direction the U.S. is headed. In a Reuters article on December 16, 2006, Jim Rogers talked about the future of the U.S. dollar, and predicted, “It’s only a matter of time before the beleaguered U.S. dollar loses its status as the world’s reserve currency and medium of exchange.” He added, “The dollar is a terribly flawed currency- You should hold as few dollars as possible. The dollar’s decline would go on for years to come.” In an interview with iTulip on April 3, 2007, Rogers said that a U.S. recession will occur soon. “I see a recession, and for a variety of reasons. Automobiles are in recession. Housing is in recession. There’s been an inverted yield curve for a while. You have a slowdown in business spending. The subprime mortgage and junk bond markets are a disaster happening or waiting to happen in the financial area. There are plenty of things going on. Plus we’ve had recessions every four to eight years since the beginning of time, so there’ nothing unusual about the fact that we’re about to have another one.” On housing, Jim Rogers is especially bearish. In the same iTulip interview, he responded to a question about the housing downturn and the consensus of economists that the correction is largely over by replying, “It has a good long way to go because never before in American history have so many people been able to buy houses with no money down. Even during the 1920s when the banks first tried interest-only mortgages borrowers at least had to put some money down. This time a lot of borrowers have put no money down on interest only mortgages. The results will be much worse.” In a May 14, 2007, Reuters article, he predicts an eventual U.S. real estate crash. Rogers said, “You can’t believe how bad it’s going to get before it gets any better.” He adds, “It’s going to be a disaster for many people who don’t have a clue about what happens when a real estate bubble pops- Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it’ll be worse because we haven’t had this kind of speculative buying in U.S. history.”

“When markets turn from bubble to reality, a lot of people get burned.”

To be continued…

Crash Prophets, Part 3
June 21, 2007

In the previous “Crash Prophets” posts, we examined the U.S. economic outlook of key market watchers and investment legends. Today, the focus is on U.S. government and Federal Reserve officials, both past and present. Specifically, I am talking about former Treasury Secretary Robert Rubin, U.S. Comptroller General and Head of the U.S. General Accountability Office David Walker, and former Federal Reserve Chairman Paul Volcker.

Robert Rubin served as Treasury Secretary under President Bill Clinton. On January 22, Rubin appeared on the Charlie Rose television show and talked about the U.S. economy becoming increasingly unsound, and the need for “excruciating decisions” to be made. He explained, “I think we face [huge] challenges. I think we can do very well in what is really a transformed global economic environment with the rise of China and India. But- I think we’re on the wrong track on almost every front right now, regardless of how you allocate the political responsibility, and what I’d like to see the new Congress do- and I think they’ve gotten off to a very good start in this respect- is to address those challenges.” Rubin added, “I think we’ve got to re-establish sound fiscal conditions- so we have an environment conducive to growth, and also to avoid the dangers that, as [Federal Reserve Chairman] Ben Bernanke said very recently in his congressional testimony, [underlie] unsound fiscal conditions. I think that’s a tremendous threat to the global economy.” Regarding the deficit and its threat to the dollar, the former Treasury Secretary predicted, “If the current account deficit doesn’t change, then at some point something is going to have to give. It seems to me that it’s very likely there’s going to have to be an adjustment of the dollar. The way to minimize the adjustment that you need is to have sound policy.” In a videotaped message for a dinner hosted by the Concord Coalition in New York last November, Mr. Rubin emphasized that the U.S. budget situation needed to be addressed now because the government was just 5 years away from “rapid acceleration” in spending related to Social Security and Medicare.

The tremendous financial burden brought on by entitlements also frightens David Walker, who is basically the nation’s accountant-in-chief. Walker is touring the United States through the 2008 elections, and according to Bloomberg, is “talking to anybody who will listen about the fiscal black hole Washington has dug itself, the ‘demographic tsunami’ that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.” His speaking tour includes economists and budget analysts from across the political spectrum. The message they are conveying is that if the U.S government continues to conduct business as usual in the coming years, the national debt ($8.8 trillion as of today) could reach $46 trillion or more, adjusted for inflation. Every year of inaction adds $2 trillion to $3 trillion, according to Walker. With the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses for these two programs are about to increase significantly. In addition, the U.S. government has spent the last few years racking up debt and borrowing money from foreign lenders. If overseas investors lose their enthusiasm for purchasing U.S. debt, the result will be higher interest rates in the United States. A large jump in interest rates would be a disaster, in which case some economists predict the federal government would print money to pay off its debt, leading to runaway inflation.

Known for his stance against inflation, Paul Volcker was Federal Reserve Chairman from 1979 to 1987 and the predecessor of Alan Greenspan. At a dinner hosted by the Concord Coalition in New York last November, Volcker predicted that the United States’ dependence on foreign money raises the risk of a crisis in the dollar as soon as the next two and a half years. He said, “It’s incredible people have gone on so long holding dollars… At some point, you will get a situation where people have had enough.” Foreign investors now own about half of the $4.4 trillion of Treasuries outstanding. On April 10, 2005, Volcker talked about the U.S. economy in the Washington Post, and said, “Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks— call them what you will… What really concerns me is that there seems to be so little willingness or capacity to do much about it.” He added, “As a nation we are consuming and investing about 6 percent more than we are producing. The difficulty is that this seemingly comfortable pattern can’t go on indefinitely… I don’t know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.” Finally, Volcker speculated, “I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.”

Robert Rubin, David Walker, and Paul Volcker insist that the U.S. government must act now to prevent a U.S. financial disaster. As the former Federal Reserve Chairman recalled, “A wise observer of the economic scene once commented that ‘what can be left to later, usually is— and then, alas, it’s too late.’ I don’t want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.”

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Dallas Fed President, Former White House Economists Voice Concern Over U.S. Debt

Yesterday I talked about the warning from former Comptroller General of the United States David M. Walker that the United States might be rapidly-heading towards a debt crisis. Once again, here’s what he said on CNBC’s Squawk Box yesterday:

I think we’re going to have an adult conversation. We just need to have it sooner rather than later before we have our own U.S. debt crisis. You know, a U.S. debt crisis could come within the next two to three years. We have huge interest rate risk. We have the lowest average maturity of any sovereign nation or major nation on debt. We have historically-low interest rates. We’re adding debt at record rates. We have to rollover a great amount each year. Our largest holder of our debt is the Federal Reserve. I mean, that’s not an arm’s length transaction. And QE2 is supposed to expire on June 30. Wake up Washington- we’ve got a problem. It’s time to come to work.

Other notable figures in the world of finance are also stepping forward and voicing their concerns over the growing U.S. debt problem. On Tuesday, Reuters’ Marc Jones and Sakari Suoninen wrote:

The U.S. debt situation is at a “tipping point,” Dallas Federal Reserve Bank President Richard Fisher said on Tuesday, and urged the U.S. central bank to refrain from any further stimulus measures.

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when,” Fisher said in a speech at the University of Frankfurt.

Fisher, seen by economists as one of the most hawkish policymakers within the Fed, said that although debt-cutting measures would be painful, he expected the U.S. to take the necessary actions.

“The short-term negotiations are very important. I look at this as a tipping point.”

Later in the week, ten former White House economists came forward with their warnings over out-of-control debt. The AFP reported Thursday:

Ten former White House economists on Thursday called for US politicians of all stripes to get serious about tackling the country’s spiraling debt, warning of a looming crisis “that could dwarf 2008.”

The bipartisan group — ten former chairs of the White House Council of Economic Advisers — said Washington’s spats over short-term budget cuts were distracting from “a more dire problem”, the long-term deficit.

“(It) is a severe threat that calls for serious and prompt attention,” they warned, in the open letter published by the Washington politics journal Politico.

“Divided government is no excuse for inaction,” signatories, including President Barack Obama’s former top economic adviser, Christina Romer said.

“While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues,” they said.

“These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008.”

According to that POLITICO piece from Thursday, the signatories included:

Martin N. Baily, a senior fellow at the Brookings Institution, served as the chairman of the Council of Economic Advisers in the Clinton administration, 1999-2001. Martin S. Feldstein, an economics professor at Harvard University, served as chairman in the Reagan administration, 1982-4. R. Glenn Hubbard, dean of the Columbia University Graduate School of Business, served as chairman in the Bush administration, 2001-3. Edward P. Lazear, economics professor at Stanford University’s Graduate School of Business, served as chairman in the Bush administration, 2006-9. N. Gregory Mankiw, an economics professor at Harvard University and influential blogger, served as chairman in the Bush administration, 2003-5. Christina D. Romer, economics professor at the University of California, Berkeley, served as the chairwoman in the Obama administration, 2009-10. Harvey S. Rosen, an economics professor at Princeton University, served as chairman in the Bush administration, 2005. Charles L. Schultze, a senior fellow emeritus at the Brookings Institution, served as chairman in the Carter administration, 1977-81. Laura D. Tyson, a professor at the Haas School of Business of the University of California, Berkeley, served as chairwoman in the Clinton administration, 1993-95. Murray L. Weidenbaum, honorary chairman of the Murray Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis, served as chairman in the Reagan administration, 1981-82.

Sources:

Jones, Marc and Suoninen, Sakari. “Fed’s Fisher: U.S. debt situation at tipping point.” Reuters. 22 Mar. 2011. (http://www.reuters.com/article/2011/03/22/us-fed-fisher-idUSTRE72L2TQ20110322). 25 Mar. 2011.

“Ex-White House economists issue debt warning.” Agence France-Presse. 24 Mar. 2011. (http://news.yahoo.com/s/afp/20110324/ts_alt_afp/useconomybudgetdeficit). 25 Mar. 2011.

“Unsustainable budget threatens nation.” POLITICO. 24 Mar. 2011. (http://www.politico.com/news/stories/0311/51864.html). 25 Mar. 2011.

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David M. Walker: ‘U.S. Debt Crisis Could Come Within The Next 2 To 3 Years’

I used to follow former Comptroller General of the United States David M. Walker quite a bit. Appointed by President Clinton, Walker served as Comptroller General and head of the Government Accountability Office from 1998 to 2008. While at the GAO, Walker warned Americans about the nation’s long-term fiscal challenges as part of the “Fiscal Wake-Up Tour.” Frustrated by Washington’s refusal to confront these challenges, Walker left the public sector on March 12, 2008, to head the Peter G. Peterson Foundation and continue his work on righting a sinking ship. On September 17, 2010, it was announced that David Walker was leaving the foundation to launch a new project called the “Comeback America Initiative.” As the Founder and Chief Executive Officer of CAI, Walker continues to engage the public and promote fiscal solutions to America’s significant financial hurdles.

CNBC staff writer Jeff Cox talked about David M. Walker and his heroic efforts on the CNBC website today. Cox wrote:

The US ranks near the bottom of developed global economies in terms of financial stability and will stay there unless it addresses its burgeoning debt problems, a new study has found.

In the Sovereign Fiscal Responsibility Index, the Comeback America Initiative ranked 34 countries according to their ability to meet their financial challenges, and the US finished 28th, said David Walker, head of the organization and former US comptroller general.

“We think it is important for the American people to understand where the United States is as compared to other countries with regard to fiscal responsibility and sustainability,” Walker said in a CNBC interview. “Americans are used to rankings and they’re used to ranking very high, but frankly in this area we rank very low.”

Disturbingly, Walker predicted the United States could be rapidly-heading towards a debt crisis. He said on CNBC’s Squawk Box today:

I think we’re going to have an adult conversation. We just need to have it sooner rather than later before we have our own U.S. debt crisis. You know, a U.S. debt crisis could come within the next two to three years. We have huge interest rate risk. We have the lowest average maturity of any sovereign nation or major nation on debt. We have historically-low interest rates. We’re adding debt at record rates. We have to rollover a great amount each year. Our largest holder of our debt is the Federal Reserve. I mean, that’s not an arm’s length transaction. And QE2 is supposed to expire on June 30. Wake up Washington- we’ve got a problem. It’s time to come to work.

Source:

Cox, Jeff. “US Finances Rank Near Worst in the World: Study.” CNBC.com. 24 Mar. 2011. (http://www.cnbc.com/id/42246531). 24 Mar. 2011.

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Economic Forecasts Buoyed By Tax Deal

More optimistic talk about U.S. economic prospects. From MarketWatch’s Steve Goldstein this morning:

Wall Street economists were tapping into their spreadsheets Tuesday, ready to ratchet up their economic growth forecasts for next year in light of the tax deal struck by President Barack Obama and congressional Republicans, particularly the surprise one-year reduction in payroll taxes…

One of the most optimistic economists was former McCain campaign adviser Mark Zandi, the chief economist of Moody’s Analytics, who now sees 4% growth in 2011, up from 2.7%. UBS economist Maury Harris also said he’ll hike his 2.7% forecast, if the proposal as drafted goes through, by a half-percentage point.

The deal “suggests more positive outlook for economic growth corporate profits [and] employment,” said John Silvia, chief economist at Wells Fargo, in a note to clients.

As the proposal seeks to extend all Bush-era income tax cuts, federal unemployment insurance, the 15% capital-gains rate, as well as lower the payroll tax by $120 billion via a 2 percentage point reduction- without cutting back spending elsewhere- deficit and debt hawks are unhappy about this development. Case in point, former Comptroller General of the United States David M. Walker wrote about the “deal” in the Washington Post this morning:

Shockingly, despite great public concern regarding federal spending, deficits and debt, evidently NONE of these proposed actions will be paid for with spending cuts in other areas. In addition, the federal government is still without a budget for fiscal 2011 even though the year started on October 1… While some compromise is necessary and should be encouraged, this “deal” does not seem reasonable from a fiscal responsibility and social equity perspective.

Sources:

Goldstein, Steve. “Economists ready to hike GDP view after tax deal.” MarketWatch. 7 Dec. 2010. (http://www.marketwatch.com/story/economists-ready-to-ratchet-up-gdp-forecasts-2010-12-07). 7 Dec. 2010.

Walker, David M. “Not the right deal to cut.” Washington Post. 7 Dec. 2010. (http://views.washingtonpost.com/leadership/panelists/2010/12/not-the-right-deal-to-cut.html). 7 Dec. 2010.

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