Mish's Global Economic Trend Analysis

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One Sided Policies Posted: 18 Sep 2010 04:17 PM PDT Here is an email from Robert who is wondering about the Fed's ability to inflate, and the consequences if they try. Robert writes ... Hello Mish, Something is bothering me. I thought there would be inflation after the US government and FED's actions, but there has been no inflation. I was wrong and you were right. I understand why and I also agree with the concepts of "peak credit" and "peak consumption," as far as the West goes at least. But this seems to mean that the government can sell vast quantities (1 -2 trillion per year) of debt directly to the FED and to other parties with few observable short or intermediate term consequences. If everyone agrees that the economies of the West will be weak for many years (for a host of reasons) and everyone also agrees that the dollar will be the reserve currency for years to come then: 1) What is the problem with running 1.5 trillion dollar deficits per year as far out as the eye can see? ( I am not being facetious.) 2) What is the problem with using federal-government borrowed money to bail out state and local governments to keep them from near implosion and the likely associated social problems? If I am missing something, what is it? Robert Fed's Primary Mission Failed Hello Robert First off, congratulations for understanding the Fed's attempt at producing inflation has failed. Many do not see it that way, but it depends on the definition of inflation, and an understanding of what the Fed is really attempting to do. The Fed's primary goal is not to get prices to rise (regardless of what they say), but rather to get banks lending, consumers spending, and businesses hiring. The Fed and Congress have failed on all three scores. One Sided Policies The Fed did not produce inflation, but there is a huge price to pay to pay for the Fed's One sided policies. The rich get richer and the poor get poorer. When the rich make a mistake they get bailed out. When the poor make a mistake they get tossed to the dogs. One needs to look at things not just from the recent "stabilization" of banks, but as an ongoing affair that has killed the middle class. Inflation was running rampant (in terms of credit in general and mortgage lending in particular). Wages did not keep up with prices and people plowed into assets as a means of savings. The bailouts did not produce inflation, but the middle class bailed out the banks and got nothing in return but higher taxes, fewer services, and looking ahead, years of stagnation. Moreover, the bondholders (such as China, Japan, and PIMCO) were made whole, while the homeowners are still mired in debt. Adding to the misery, banks lord it over on homeowners with total nonsense about the morality of walking away. We will all suffer the consequences of these one sided moral-hazard policies for a decade to come. Quantitative easing, bailouts, extend-and-pretend schemes, and the alphabet soup of lending facilities all have very real consequences. Near-term or intermediate-term (a few years out) inflation are not likely in the mix, but the distortions caused by the Fed and Congress will still affect us for a decade to come. Those distortions (caused by one-sided policies that favor banks and the wealthy) have killed and will continue to kill the middle class. Robert, that is what you sensed, even if you could not put your finger on it. Those who missed it should read Myths About "What's Economically Important" for a discussion about how and why credit, not prices is the key to the mess we are in. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Fort Worth, Texas Insolvent Posted: 18 Sep 2010 02:24 AM PDT The Star-Telegram reports Fort Worth pension bubble will blow up in our faces. To understand why Fort Worth's pension system is such a financial disaster, look at one month's list of recent retirements. In January, a 53-year-old policeman retired with an annual benefit of $90,312 for life, plus $256,000 in a lump sum payment. Another policeman, 57, got almost $74,000 annually, plus $313,000 in a lump sum. A 54-year-old firefighter got an annual pension of $90,130, plus $178,000 in cash. With an average age of 50 for the police and 54 for the firemen in this group, they're likely to spend more years in retirement than they worked. An analysis for the City Council, presented in July, projected that the retiring policemen would collect $3.1 million in pension pay. You don't have to be an actuary to know that this pension plan will end badly. The technical phrase is "trending toward insolvency." Except that the city is on the hook for all the promised benefits. Taxpayers will have to pony up hefty contributions for years, even generations, and the city may have to cut services to afford it. The pension for city employees is currently projected to pay out $432 million more than it brings in over the next 30 years. And that's the optimistic scenario. If investment returns average 7 percent, rather than the dreamy 8.5 percent in the assumptions, the unfunded liability could approach $1 billion. The pension will require $60 million in city funds next year, and it's already a drag on a strapped city budget that has to close swimming pools and libraries and impose furloughs. Every year, the pension hole grows, because the benefits keep piling up. "This is the elephant in the room," Mayor Mike Moncrief told the council in late July. "Not only for this budget, but for all the budgets to come." The city manager appointed an ad hoc committee to look at the pension problem. It had a few businessmen, but most were employees -- a mix of police, fire and general workers. Imagine they had a little conflict? They recommended that the city contribute an additional 6 percent of employee pay into the plan. This is what it always comes down to: corrupt politicians pandering to public unions to win votes for reelection. Moreover, the result is always the same, greedy public unions wanting to raise taxes to pay for their exorbitant wages and benefits. Fort Worth is now bankrupt. The only solution is to fire the city manager, declare bankruptcy, and resolve the issue of benefits in court. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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