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On the Social Security 2012 Report to Congress

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Posted by Bruce Krasting

on Wednesday, 25 April 2012 08:16

The Social Security Trust Fund (SSTF) 2012 report to Congress is now out (link). It’s 242 pages and contains a great deal of information. I have reviewed a number of sections in the report that I consider to be key measures of SS’s health. Not one of those variables showed any improvement. Some highlights:

-The Net Present Value of the unfunded liabilities at SS is now a staggering $20.5 Trillion.  One year ago this was $17.9T ($2.6T increase - 15% YoY). This yardstick grew at more than double the rate of the entire national debt 12/31/10 = $14T, 12/31/11 = $15.2T, total increase = $1.2T).

This deterioration is staring policy makers in the face. The burden that SS will put on future generations is growing exponentially.

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-The “Drop Dead Date” where the SSTF is exhausted has been moved up three years to 2033. This is a number that the MSM will focus on. It is a bogus deadline. The SSTF must maintain at least one year’s worth of benefits. The year that TF assets will equal one year of payments will be ~2026. This means that anyone who is age 53 today can expect to get 75% of the value that a baby boomer will get. (Under current law, when the TF is exhausted, benefit payments must be cut.)

Fourteen years is not a very long time for people to plan and adjust for what's coming. The Politicians will have to address this reality sooner versus later. It is already passed the time where it is unfair to those who will be affected.

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-The Drop Dead Date for the Disability Fund has been changed from 2017 to 2016. This is important as the TF has confirmed that the next President will HAVE to bailout one component of SS. It is crucial to ask the candidates what they will do if elected. They better have an answer. When the debate on the future of Disability Insurance (DI) gets going, it will be marked with a sharp divide of opinions. It could easily be a factor in the election.

To Read More CLICK HERE

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Personal Finance

Après Moi, le Déluge

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Posted by David Galland

on Saturday, 21 April 2012 09:44

By David Galland

Dear Reader,

If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured.

Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped.

It is said that history doesn't repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress.

You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue – and for reasons I will touch on momentarily, I firmly believe it will – then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to "level the playing field" and the global economy, already in tatters, will fall off the edge.

There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.

In France, if no candidate attracts no better than 50% of the vote, then the two leading candidates go to a decisive runoff vote, this time around to be held on May 6.

The current president, Nicolas Sarkozy, a conservative in name only, was running at a fairly steady gait toward re-election (thanks to the head start awarded all incumbents), when leading socialist candidate Francois Hollande came out with a proposal to tax anyone with an annual income of over one million euros at a rate of 75%. He also promised to add a tax on all financial transactions and increase taxes on France's biggest companies to 35% – securing bragging rights as levying the world's third-highest corporate taxes, the US being #1. This all on top of a 25% VAT, one of the world's highest. By some calculations, the result of Hollande's new taxes is that effectively 100% of all incomes over one million euros will now be stripped away by the state.

For good measure, Hollande also promised to reverse the recent modest increase in retirement age from 60 to 62 pushed through by Sarkozy. While I am sure it is mere coincidence, I found it noteworthy that Mssr. Hollande's campaign slogan is "Change – Now!"

Remarkably, at least for those with some small understanding of economics, as a result of leaning into the microphone with these proposals Hollande has galloped ahead of all other potential contenders and is now projected to finish nose by nose with Sarkozy this weekend.

After which the also-rans will be removed from the race, freeing their supporters to share their affections elsewhere. Given that the leading contender for third place with an estimated 14% of the vote is one Jean-Luc Mélenchon – charitably categorized as "far left", a label that can be applied to most of the other candidates – it is projected that the "conservative" Mssr. Sarkozy will go down in double-digit flames come May 6.

Bringing to mind the prophetic utterance of Louis XV: "Après moi, le deluge."

The deluge in Louis' case manifested as the murderous affair commonly known as the French Revolution. In the case of Mssr. Hollande taking up residence in the Palais de l'Élysée, the deluge is likely to manifest in the form of rising interest rates as investors look to protect against an acceleration in the country's debt to GDP ratio, already projected to hit almost 90% this year, exacerbated by a flight of capital, investors, entrepreneurs and large businesses.

To Read More CLICK HERE

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Personal Finance

Why the Left Misunderstands Income Inequality

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Posted by Azizonomics

on Friday, 20 April 2012 09:39

By Azizonomics

There is a widely-held notion on the political left that the key economic problem that our civilisation faces is income inequality.

To wit:

America emerged from the Great Depression and the Second World War with a much more equal distribution of income than it had in the 1920s; our society became middle-class in a way it hadn’t been before. This new, more equal society persisted for 30 years. But then we began pulling apart, with huge income gains for those with already high incomes. As the Congressional Budget Office has documented, the 1 percent — the group implicitly singled out in the slogan “We are the 99 percent” — saw its real income nearly quadruple between 1979 and 2007, dwarfing the very modest gains of ordinary Americans. Other evidence shows that within the 1 percent, the richest 0.1 percent and the richest 0.01 percent saw even larger gains.

By 2007, America was about as unequal as it had been on the eve of the Great Depression — and sure enough, just after hitting this milestone, we plunged into the worst slump since the Depression. This probably wasn’t a coincidence, although economists are still working on trying to understand the linkages between inequality and vulnerability to economic crisis.

I mostly agree that income inequality is a huge problem, although I believe that it is a symptom of a wider malaise. But income inequality is an important symptom of that wider malaise.

Here’s the key chart:

0114krugman1-blog480

However it is just as important, perhaps more important to identify the causes of the income inequality.

I have my own pet theory:

The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.

To Read More CLICK HERE



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Personal Finance

“Net Sober”

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Posted by Eric Fry - The Daily Reckoning

on Wednesday, 18 April 2012 15:01

Eric Fry
Derivatives are the “meat and meat by-products” of the financial markets. They look, smell and taste just like regular securities, but almost no one understands why we need them in the first place. After all, what’s wrong with actual meat? Or to re-phrase the question: Is Spam really an advancement over ham?

More importantly, can we trust the derivatives markets? Or might they be toxic? Might they subject the financial markets to devastating side effects?

No one really knows…and since lab rats refuse to eat them, we must assess the risks of derivatives by relying on suppositions, theories and conjecture. Therefore, as a public service, your California editor will offer a few suppositions, theories and conjectures about the rapidly expanding derivatives markets.

The worldwide marketplace of financial derivatives is enormous. No one disputes that fact. But the potential destructive impact of these arcane, opaque securities is very much in dispute.

The apologists for financial derivatives usually say something like, “Sure, the derivatives markets are huge on a gross basis, but relatively small on a net basis.” According to this logic, a bank that purchased $1 trillion worth of Spanish interest rate swaps from one-party, but also sold $1 trillion worth of Spanish interest rate swaps to another party, has zero “net exposure.”

Mathematically, that statement is correct. Realistically, it is a delusion. If the financial markets should hit a pothole or two, that “zero net exposure” has the potential to behave a lot more like the $2 trillion of gross exposure. How could that happen? Very simple. One or more of the parties to these enormous transactions would have to renege on its obligations, thereby triggering a domino effect. Very simple…and not difficult to imagine.

In fact, we’ve already seen the trailer for this horror film. The bankruptcy of Lehman Brothers in 2008 was not only the demise of a prestigious investment bank, it was also the demise of a major counterparty to numerous derivatives contracts. Without Lehman, billions of dollars’ worth of “zero net exposure” suddenly became billions of dollars of plain, old exposure — i.e., unhedged risk.

But that’s when the US Treasury stepped into the path of the falling dominoes with trillions of dollars of newly printed cash and government guarantees. As a result, the dominoes did not merely stop falling, but Wall Street banks were also able to take their fallen dominoes to the Fed and trade them for cash. Pretty nifty, no?

To Read More CLICK HERE

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Personal Finance

Housing: New Bubble or More Trouble?

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Posted by John Rubino

on Tuesday, 17 April 2012 17:50

By John Rubino on April 17, 2012

The in-laws own a gas station in Miami that they’ve wanted to sell for years. But they dithered when the market was hot and ended up being stuck with it when interest evaporated in 2009.

Lately, though, the phone has begun to ring again. It’s not exactly a feeding frenzy but real offers are coming from legitimate buyers for the first time in three years.

That’s actually a pretty good description of real estate in general, where low interest rates have convinced a growing number of people that it’s time to buy. See this upbeat story on the home builders:

    Pulte, Lennar jump as survey shows housing rebound
    NEW YORK (MarketWatch) — Shares of U.S. homebuilders rallied on Wednesday after a Wells Fargo analyst’s research report said data from 20 select markets nationwide are showing strength across the board.

    “For the third consecutive month, our survey points to an improvement in orders suggesting 2012 may be the long-awaited recovery year for housing,” the note said.

    PulteGroup PHM -1.39% added more than 8%, Lennar Corp. LEN -1.47% gained 5%, D.R. Horton DHI -2.44% rose 4.2% and Toll Bros. TOL -0.86% gained 3.8%.

    The bellwether industry ETF, the iShares Dow Jones U.S. Home Construction Index Fund ITB rose 3.4%.

    Wells Fargo’s monthly Neighborhood Watch Survey, which tracks 150 sales managers at housing tracts in 20 markets, showed that March results were strong across all measured metrics. In particular, the survey noted that March’s numbers surpassed poll       participants’ expectations by the widest margin since the survey started, in 2001.

    Wells said that pricing in the 20 markets also improved, both month-to-month and over year-ago figures. Sales managers’ commentary on market activity indicated that buyer confidence seems to be improving as inventory shrinks.

    “Sales managers suggested there is a sense of urgency in the marketplace as buyers anticipate higher home prices and/or mortgage rates,” the report said.

Bidding wars are even returning to some markets:

    Market squeezing homebuyers
    Home shopper Dian Schneider was four houses in on a whirlwind tour of local homes for sale Friday when her real estate agent issued her a warning.

    “Now if you like this one you’ll need to move today because there are already two offers on it, and they’re both above list price,” said Anna Hernandez of McKinzie Nielsen Real Estate. “They’re not crazy high, but you’ll have to go in high, too, if you’re serious about it.”

    Schneider nodded knowingly as she peeked inside closets, flushed toilets and opened cabinet doors.

    The 50-year-old single mom had already missed out on two homes she’d made offers on. She was outbid on one, and pulled out of a second over concerns about its dated electrical system.

    “In hindsight, I probably should have taken that one,” Schneider said.

    Almost all the available inventory in her price range is badly in need of repairs, and upgrading the electrical on the home she passed up wouldn’t have cost as much as she’d assumed, she later learned. But back then, she didn’t fully appreciate how lucky she’d been to find something.

    The Bakersfield area had only 583 single-family homes for sale in March, about a third fewer than in March of last year.

    Bidding war return
    The result has been fierce bidding wars and almost immediate turnover for anything of quality that’s priced reasonably, whether it’s a modest starter home or a mansion.

    “Everybody’s pretty much in the same boat right now, regardless of price,” said Robert Morris, who sells for Watson Realty ERA. “The supply keeps dropping and dropping and there’s nothing replacing it.”

    Broker Nancy Harper of Nancy Harper Realty recalled listing a home the day before Easter. By Easter Sunday, it had six offers on it, and when she called the losing agents to tell them their offers had been rejected, two of them burst into tears.

    “They told me they’d written something like 14 offers for clients and just couldn’t get one accepted,” Harper said. “When you have agents bursting into tears, boy, that’s low inventory.”

So is the housing bubble back?

To Read More CLICK HERE

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