Wednesday, November 13, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Desert Hot Springs, CA Mulls Bankruptcy Due to Soaring Wages and Pensions; The "Only" Option; Just Deserts for CalPERS

Posted: 13 Nov 2013 04:23 PM PST

Add Desert Hot Springs, CA to the list of California cities in dire straits due to poor management, union wages, and ridiculously unaffordable pension promises.

Please consider Another U.S. city mulls bankruptcy due to soaring wages and pensions
A resort town in California warned on Tuesday that it will run out of money by March due to burdensome salary and pension costs and could join other U.S. cities that have recently filed for bankruptcy protection.

A bankruptcy filing by Desert Hot Springs, a city of 26,000 about 110 miles east of Los Angeles, would make it the third California city along with San Bernardino and Stockton to seek court protection from creditors.

San Bernardino and Detroit - the biggest U.S. city to seek Chapter 9 protection - are likely to set precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.

The problems in Desert Hot Springs came to light last week when a new finance director reviewed the city's records and discovered a $3 million shortfall in its budget of $13.5 million. Amy Aguer, the interim director of finance, did not have details on how the shortfall occurred but said it was the result of higher-than-expected pension and salary costs, especially in the police department, and overly optimistic estimates of revenue.

"It's obvious we can't continue with salaries and pensions that are in the stratosphere, no matter how much love there is for our police department," said Russell Betts, a council member.

Desert Hot Springs, which is near Palm Springs, filed for bankruptcy in 2001 after losing a multimillion dollar lawsuit and still servicing $9.7 million of bond debt issued to fund its exit from Chapter 9 bankruptcy.

In a report issued last week, Aguer said bankruptcy was a real option under consideration, although on Tuesday she expressed hope that the city could avoid that fate this fiscal year.

Aguer said nearly 70 percent of the city's budget was consumed by police costs, most of which were spent on salaries and pension payments to the California Public Employees' Retirement System, or Calpers.

Calpers is America's biggest public pension fund, with assets of $277 billion. It has argued strenuously in court that pension payments cannot be touched, even in a bankruptcy.
The "Only" Option

It is ridiculous to hope Desert Hot Springs can avoid bankruptcy. Its fate is sealed for the second time. Bankruptcy is the only option.

The choice is now or later. Now makes more sense.

Just Deserts for CalPERS

I long for the day that a judge rules pension costs are not sacrosanct. And that day is coming soon!

I expect such a ruling in Detroit. And when it happens, it will open up a floodgate of cities willing to do the right thing, and the right thing is to force clawbacks in absurd pension promises.

I had an original title to this post of "Screw CalPERS". That title was wrong. It is taxpayers who are being screwed, not overpaid, underworked, undeserving public union workers.

50% Clawbacks

Clawbacks of 50% or more in union pension promises are not only sane, but "fair".

Taxpayers should not have to foot the bill for union threats, coercion, bribery, and vote buying. It's that simple.

A follow-up on the "fairness" aspect and how to achieve it, will be coming up shortly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Free Money Idiocy: Switzerland Referendum Proposes "Free Money" Annually to Everyone Alive; US Progressives Join the Parade; Hyperinflation?

Posted: 13 Nov 2013 11:42 AM PST

People constantly ask me what it would take for me to abandon my stance that "hyperinflation is not going to happen in the US".

My answer has always been "free money" (not credit), on a big enough scale. Note that QE causes huge economic distortions but it is not "free money".

Free Money Proposal

In Switzerland, enough signatures have been gathered to put a "free money" proposal on the ballot. To collect, all you have to do is breathe. Rich and poor alike would get the money.

New York Times economic-writer Annie Lowrie discusses the idea in Switzerland's Proposal to Pay People for Being Alive
This fall, a truck dumped eight million coins outside the Parliament building in Bern, one for every Swiss citizen. It was a publicity stunt for advocates of an audacious social policy that just might become reality in the tiny, rich country. Along with the coins, activists delivered 125,000 signatures — enough to trigger a Swiss public referendum, this time on providing a monthly income to every citizen, no strings attached.

Every month, every Swiss person would receive a check from the government, no matter how rich or poor, how hardworking or lazy, how old or young. Poverty would disappear.

The proposal is, in part, the brainchild of a German-born artist named Enno Schmidt, a leader in the basic-income movement. When we spoke, Schmidt repeatedly described the policy as "stimmig." Like many German words, it has no English equivalent, but it means something like "coherent and harmonious," with a dash of "beauty" thrown in. It is an idea whose time has come, he was saying.

Go to a cocktail party in Berlin, and there is always someone spouting off about the benefits of a basic income, just as you might hear someone talking up Robin Hood taxes in New York or single-payer health care in Washington. And it's not only in vogue in wealthy Switzerland. Beleaguered and debt-wracked Cyprus is weighing the implementation of basic incomes, too. They even are whispered about in the United States, where certain wonks on the libertarian right and liberal left have come to a strange convergence around the idea — some prefer an unconditional "basic" income that would go out to everyone, no strings attached; others a means-tested "minimum" income to supplement the earnings of the poor up to a given level.
Giving Money Away is Not Libertarian

I need to interrupt Lowrie right here, for further discussion.

No one who can rightfully call themselves a Libertarian, can possibly support such an economically inane proposal.

To give money away, it would have to be taken, by the government from someone (via taxes) to be distributed to someone else.

Alternatively, money would be printed into existence causing inflation. Either way, it would not be "free".

There is no such thing as "free money", and no libertarian would support increased taxes.

Ramblings Continue
The case from the right is one of expediency and efficacy. Let's say that Congress decided to provide a basic income through the tax code or by expanding the Social Security program. Such a system might work better and be fairer than the current patchwork of programs, including welfare, food stamps and housing vouchers. A single father with two jobs and two children would no longer have to worry about the hassle of visiting a bunch of offices to receive benefits. And giving him a single lump sum might help him use his federal dollars better. Housing vouchers have to be spent on housing, food stamps on food. Those dollars would be more valuable — both to the recipient and the economy at large — if they were fungible.
"Case From the Right"? Really?

A stated above, the only way to give away money without causing massive inflation is to take it via taxation and redistribute it, something no true libertarian or conservative could ever propose.

Does Lowrie know right from left?

She goes on and on proving without a doubt she does not know right from left, or true conservatives from progressive liberal lunatics pretending to be conservatives.
Even better, conservatives think, such a program could significantly reduce the size of our federal bureaucracy. It could take the place of welfare, food stamps, housing vouchers and hundreds of other programs, all at once: Hello, basic income; goodbye, H.U.D. Charles Murray of the conservative American Enterprise Institute has proposed a minimum income for just that reason — feed the poor, and starve the beast. "Give the money to the people," Murray wrote in his book "In Our Hands: A Plan to Replace the Welfare State." He suggested guaranteeing $10,000 a year to anyone meeting the following conditions: be American, be over 21, stay out of jail and — as he once quipped — "have a pulse."
Dissing the Idea, then Finishing Wrong

In a temporary bout of sanity, Lowrie states "There are strong arguments against minimum or basic incomes, too. Cost is one. Creating a massive disincentive to work is another."

Her economic sanity was short lived. Lowrie goes on to say "But some experts said the effect might be smaller than you would think."

As icing on the socialist redistribution cake,  Lowrie concludes with "minimum incomes just might be stimmig for the United States too."

Clearly Insane

The proposal is clearly insane on many grounds. If printing money and sloshing it around ended poverty, Zimbabwe, Argentina (and lately Venezuela) would be the wealthiest nations on the planet.

The only alternative to printing is raising taxes on the wealth producers as part of a socialist redistribution scheme.

But even that cannot possibly work for three obvious reasons.

Birthrate, Fraud, Illegal Immigration

In one second flat it should not be hard to figure out what would happen if the US gave $10,000 a year to all US citizens [See addendum]

The first thing that would happen is the birthrate in ghettos would soar. Many 16 year old females would have kids 5 years in a row, thereby collecting $50,000 a year.

Legal and illegal entry into the US would soar. People would flock to the US from all over the world to have babies because under US law anyone born in the US is a US citizen.

And what about fraud? Sheeesh. Fake birth certificates would be worth $10,000 each.

Loss of Faith

Hyperinflation the complete loss of faith in currency. It is caused by a political event (or series of them) that results in massive printing. The above proposal, in sufficient size, indexed to price inflation, would do it.

For an historical country-by-country analysis of hyperinflation events please see Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?.

For discussion of hyperinflation theory vs. practice, including an analysis of absurd calls for US hyperinflation, please see Hyperinflation Nonsense in Multiple Places.

Current Hyperinflation Example

For a point-by-point discussion of the ongoing hyperinflation in Venezuela and the politics that caused it, please see Venezuela's Hyperinflation Anatomy; Army Storms Caracas Electronics Stores; Total Economic Collapse Underway; Could This Happen in US?

One Thing

Political error is the root cause of every hyperinflation. Please click on the above links for discussion.

The one thing that would get me to change my mind on hyperinflation is now actively promoted by economically illiterate writers at the New York Times.

Should the US try such a scheme, in size, especially if indexed to price inflation, the result would be ever-escalating printing as the alleged cure for the political belief that "people do not have enough money to live on".

No Change in My Hyperinflation Stance

This post does not represent a change in stance by me.

Here's the key point: Just because someone proposes something obviously stupid is not an indication it has any realistic chance of happening.

I believe the odds are close to zero Congress would do such a thing, in sufficient size. Child tax credits are one of many examples of redistribution schemes of insufficient size.

Assuming I am wrong about the political likelihood of such an event, I would certainly change my mind about hyperinflation chances, something I have always stated.

Addendum:

In Switzerland the proposal was for every person regardless of age.I missed the point in the US proposal that it was 21 and older, even though I quoted it as such.

Regardless, everything else applies, and the proposal is absurd for all the other reasons stated.  There is nothing conservative or libertarian about it.

The idea that we can eliminate poverty by printing money and giving it away is economic lunacy. Those who espouse such silliness do not understand inflation, wealth, or money.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Reader Explains Why Her Family of Four (with existing coverage) Opts Out of Obamacare

Posted: 13 Nov 2013 08:29 AM PST

In the email below, reader Stacie explains why she and her family of four, all healthy, opt out of Obamacare. Instead she is willing to pay the penalty and use cash-only healthcare services.

Stacie's family had affordable coverage before. Now they don't have any coverage.

Yes, this is yet another case of Obamashock!

Stacie writes ...
Hello Mish!

I find all your articles very insightful and educational. I especially appreciate your ability to bring "light" to Obamacare and what it means for our country going forward.

My husband and I are both 28. (Healthy, non-smokers and no preexisting conditions) We also have two young daughters who are healthy.

Our plan was to sign up for another year of coverage through my husband's employer. Due to increase costs, they are only offering one plan with an HSA. However, these HSA deductibles are higher than I have ever seen. For our family it is $12,000 (in-network). The premiums are $720 per month. $720 a month for the privilege of getting worse coverage.

The exchange is offering similar coverage and premiums. Thus, we are making a tough decision. We are opting out of coverage. It is cheaper for us to use cash only clinics,  eat organic food and continue to pay for our gym membership.

I believe the Obama administration thought no one with existing coverage would opt out. But when new "affordable" premiums are roughly 25-30% of a healthy, young family's total income, what do they expect?

Healthcare premiums should not be the same percentage as a mortgage payment.

Thanks for all you do,

Stacie

Obamacare Severely Penalizes Healthy Lifestyles

It was well understood, in advance, at least by Mish readers, that young, healthy individuals and families, would subsidize overweight, older, citizens with poor lifestyles.

This is a prime "Obamashock!" case in point.

Obamashock! Ongoing Recap


Anecdotes do not constitute "data". Unfortunately, I do not have hard counts of those like Stacie.

Like you, I can only wonder how many readers are in Stacie's shoes. The only answer I can come up with is "too many".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Retirement for Chicago Park District Employees, With Full Benefits: Age 58; Reflections on Chicago's Second Triple-Notch Bond Downgrade in Six Months

Posted: 12 Nov 2013 10:55 PM PST

Want to retire at age 58? With Full benefits? When Private sector workers do not qualify for full Social Security benefits until age 67?

Who doesn't?

Hey, no problem. Just work for the Chicago park district (or countless city police and fire departments).

Retirement for Chicago Park District Employees, With Full Benefits: Age 58

Please consider the November 7th article Parks and Wrecks by the Illinois Policy Institute.
The Illinois General Assembly today approved a pension bill that requires taxpayers to pay an additional $75 million into the Chicago Park District pension fund in addition to tripling the taxpayer contribution to the troubled pension fund.

Make no mistake: This bill is bad for workers and taxpayers. It will most likely result in higher taxes and fees for city residents, but no greater level of retirement security for park district workers.

The Chicago Park District has more than $1.4 billion in official debt. This includes $40 million in debt related to retiree health care, $426 million in pension debt and $944 million in other long-term debt.

Private sector workers do not qualify for full Social Security benefits until age 67; the retirement age for the majority of Chicago Park District workers, under this bill, would be 58. Any pension reform bill must match the government retirement age to the private sector retirement age to fix the system.

The bottom line is that with today's actions, lawmakers in Springfield cemented tax and fee increases on Chicago residents. They are continuing to paper over the city's pension problem and refusing to tackle it head on.

Reflections on Chicago's Second Triple-Notch Bond Downgrade in Six Months

Also consider Chicago's triple-notch credit downgrade
Pension costs are already unraveling the state's finances. Now it's the city of Chicago's turn.

The city's out-of-control pension liabilities and "accelerating budget pressures associated with those liabilities" has resulted in another credit downgrade by Moody's Investors Service.

The national credit rating agency downgraded the city's nearly $8 billion in general obligation bonds to A3 from Aa3. This is a triple-notch downgrade.

Chicago is now just four notches above junk-bond status – any further downgrades mean the city is likely to face problems borrowing money.

The agency made good on its April 2013 promise to evaluate state and local pension plans on more realistic assumptions. At that time, Moody's placed 29 local governments under review – including Chicago.

The rating agency has long critiqued pension funds' use of overly ambitious investment return targets that allow funds to understate their true pension shortfalls.

Based on the new Moody's methodology, which uses more conservative assumptions, Chicago's 2012 pension shortfall jumps nearly 90 percent, to $36 billion from $19 billion.


However, Chicago's burgeoning liability is not the city's only problem. The yearly bill to pay for those pensions is set to spike 2.5 times to $1.2 billion in 2015 from $467 million in 2014.



The increase is due largely to a law that will require significantly higher pension contributions by the city beginning in 2015. These contributions will create a "tremendous strain" on the city's operating budget, hurting the Chicagoans that most depend on core government services such as education, health care and public safety.

Chicago's crisis is no different from what the state is experiencing. Under new Moody's methodology, the underfunding for the state's five state-run funds is set to approach $200 billion.

Pensions are threatening to bring down both Chicago and the state as a whole.
Reflections on Pension Plans in General

Pensions are the #1 problem for cities and states. The Fed artificially suppressing  interest rates makes matters worse.

Pension plans heading into the crisis were underweight equities. Now, because bond yields in general have collapsed, pension plans are likely overweight stocks, hoping to catch up at the worst possible time.

Even if the above assumption is false, and pension plans are now weighted normally, how the hell can plans meet 7.5% to 8.0% return assumptions with 10-year bonds yielding 2.75%?

The answer is simple: It won't happen. Pension plans attempting to meet unreasonable expectations by leveraging into equities now will be hammered in due time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

No comments:

Post a Comment