Senate majority leader Harry Reid provides us with one of the great quotes of our time. Enjoy:

Now this is one of those ‘taking people out of context’ moments, but it is still funny as hell to watch. Perhaps losing 36,000 jobs is better than expected, or even a sign of a recovery (which I doubt), but needless to say, it’s hard to spin losing 36,000 jobs as good news.

Spying on Our Trash

In Britain, 2.5 million trash cans (or excuse me, rubbish bins) have had electronic microchips installed to measure the amount of trash each home throws away. According to the Daily Mail,

“This is an increase of nearly two-thirds in just a year. The bins, which can be electronically identified and weighed, are designed for ‘pay-as-you-throw’ rubbish tax schemes. Under such schemes  -  which are likely to be hugely unpopular  -  families who put out more waste will pay higher taxes to their local council.”

While no tax has yet to be introduced, it would seem obvious that a tax is the plan. This does make some sense; people who throw away more should probably be charged more. But to me, the scheme comes across as just  another method for the government to extract money from its citizens and intrude into their private lives.

Selling Judicial Appointments?

In a disturbing story, Barack Obama has appointed Scott Matheson to the 10th Circuit Court of appeals. That would appear rather innocuous, but at the same time he is hosting congressman Jim Matheson–Scott Matheson’s brother–to convince him to change his vote on healthcare. Now Scott Matheson is very qualified, but so are a lot of other people. And given the shady dealings in Nebraska and Louisiana, it begs the question: coincidence?

It’s no secret that spending is down these days. And while I think it’s about time that American citizens actually start saving money, it undoubtedly hurts businesses when consumer spending tanks.

One of the reasons consumer spending is down, other than an increased propensity to save, is simply that during the mortgage meltdown, massive amounts of money disappeared as housing equity morphed into devalued foreclosure sales. The Federal Reserve and Treasury have responded by pumping an ungodly amount of money back into the economy, which raises serious concerns about future inflation. But for now, much of that money is stuck in the banks and velocity is extremely low. Thus, businesses are still hurting for sales.

So what have some city governments and businesses done to combat this? Well, they’ve decided to print their own money. MSN Money highlights one such example:

“Last year, two Detroit tavern owners were sitting at the bar, sampling their beverages and bemoaning the local economy — no one in the city had cash, and when they did, they spent it in the suburbs. Then the pair hit on a solution: Print their own money.

“It is, after all, perfectly legal for anyone to issue currency, as long as it doesn’t look too much like a U.S. dollar. Thus was born the Detroit Cheer, a local scrip accepted by a handful of city businesses, including a pizzeria, an electrician and a doggy day care center.”

Indeed, this money appears to act more as a coupon which is accepted by a handful of businesses. However, in some cases these currencies have really taken off, such as “The western Massachusetts berkshare [which] is accepted by an estimated 400 businesses and has circulated to the tune of $2.5 million.”

In the end however, most of these currencies fail. Sociologist Ed Collum’s study of 82 of these currencies showed the survival rate to be only 20%.  It is, however, interesting to see how currencies can formulate from the ground up instead of the top down. It also makes one wonder whether people should be able to use gold or silver or something else like that as a competing currency. That is, after all, what is written in our constitution.

I've always been more of a lizard guy myself...

“Value is destroyed, not created, by any business that loses money over its lifetime. The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them.”

Many have oversimplified that Buffet didn’t understand dot.com’s, therefore he didn’t invest in them; and this is why he was able to have the last laugh once the floor caved in on the bubble. As he says: “Risk comes from not knowing what you’re doing.” My feeling is that Buffet knew exactly what dot.com’s were, he simply chose not to bite. In the irrational exuberance of market surges, Buffet, as stated above, knew these companies were not making a profit. Therefore there was no true underlying value for most of them. Any great investor, or gambler, knows that the biggest wins usually come when you’re the 5% minority making the wager, and public opinion is going the other way.

As brilliant an investor as Buffet has proven to be, everybody loses sometimes. When you’re losses make shock waves over the Internet, it’s safe to say that you’ve arrived.

This is the kind of creature I could buy motorcycle insurance from.

Buffet rolled out the first Geico credit card in 2005. The Geico Platinum MasterCard was a new feather in the cap for the company, aimed at allowing Americans to do what they do best: spend. The credit arm idea, at least as far as it being a profitable one, has proven not to be “so easy a caveman could do it.” It has cost the company $50 million as Buffet sold off the credit card receivables for 55 cents on the dollar.

It’s always easy to second guess; frankly, isn’t that what 90% of the media (new and old) is here for? But it’s fascinating to me that Buffet wasn’t able to see a debt-riddled, consumption-driven society about to hit the wall when unveiling the Geico Platinum MasterCard in 2005. Every level of American society was (and is) drowning in debt: the consumer level, the city government level, the county government level, the state government level, and the federal government level. Almost every living, breathing human being is in debt, and many spend more than they make or what they’re worth. If there was ever a king of bubbles for Buffet to sniff out, I would think the American economy would have been it.

The great foreseer of the dot.com bubble must have forgot his number one sound bite on sound investing: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Fiscal Flash is forgetting about net exports...

Current US Debt Ceiling: $14.3 trillion (1)

This figure is supposed to get US finances through 2010.

Current Unfunded Liabilities: Estimated $60 trillion

These are the promises of the federal government made through Social Security, Medicare and government pensions. There is much fanfare made of the legitimacy of unfunded liability estimates (some have surfaced at over $100 trillion), or even the concept of a liability being “unfunded” in general. One thing is for sure: people are paying into these systems, and they are unsustainable; barreling on a path toward bankruptcy.

David Walker, former Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO), testified in November 2009:

Clearly, escalating federal deficits and debt levels, combined with our growing dependency on foreign lenders and the deepening federal financial hole represent challenges that must be addressed…A commission could make recommendations in connection with needed statutory budget controls, social insurance programs reform, tax reforms, additional health care reforms, and other appropriate areas… Its efforts should involve various citizen education and engagement efforts and result in a range of recommendations that will be guaranteed a vote in the Congress.

Importantly, everything must be on the table for any commission to be credible and to have a real chance of success. This includes acknowledging the need to modernize the current social insurance programs, constrain federal spending, including defense spending, and raise additional revenues.

In the final analysis, this special process should be designed to facilitate achieving a significant reduction in the over $60 trillion in federal liabilities and unfunded promises, and to create a climate and momentum to do more over time. This process could also enable achievement of the so-called “grand bargain” that President Obama has spoken of. (2)

The on- or off-balance sheet obligations of Fannie Mae and Freddie Mac: $5 trillion (3)

As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.’s $12 trillion mortgage market. (4)

Budget for military expenditures for 2010: $685.1 billion, or $1.87 billion/day (5)

As of September 2009, China owned 23.35% of US Treasury Debt; Japan 21.13%. The two Asian countries are far and away the largest holders of US debt. (6)

Obama’s recently released budget projections:

Fiscal 2011 budgeted deficit: $1.56 trillion
Fiscal 2012 budgeted deficit: $1.27 trillion
Fiscal 2013 budgeted deficit: $727 billion
Fiscal 2014 budgeted deficit: $706 billion
Fiscal 2015 budgeted deficit: $752 billion
Fiscal 2016 budgeted deficit: $778 billion
Fiscal 2017 budgeted deficit: $778 billion
Fiscal 2018 budgeted deficit: $785 billion
Fiscal 2019 budgeted deficit: $908 billion
Fiscal 2020 budgeted deficit: $1.003 trillion (7)

Remember, these numbers are assuming economic recovery in the coming years, where tax revenues will begin increasing again. Somebody is going to get taxed to the hilt to cover the spending and, at some point, tax revenues decline as a result of increased tax rates. See the Laffer curve:

Art Laffer is a supply-side economist I don't always agree with, but this phenomenon is undeniable.

Reasonable minds can disagree as to where that tax rate figure lies in a given economic climate. President Obama better hope that employment is way up, incomes are rising and inflation is in check for these budget projections to hit the mark. However, the federal government is notorious for mis-calculating income and expenses.

As of the end of fiscal year 2009, every 1% increase in interest rates on federal debt will add an additional $147 billion to annual interest charges.

So what are the possible consequences of these staggering numbers? If the United States thinks it can continue to run three quarters of a trillion dollars, to a trillion dollar deficit for the next 10 years, on top of the obligations listed above, we may be in for a rude awakening. President Obama, his administration and the White House website preach fiscal responsibility as the cornerstone of their budget; but I just don’t see it. I understand they want to spend to prop up the economy, but fiscal responsibility? In a world of failing and floundering state and national governments, people are just trying to survive. Meanwhile, China’s GDP grew an astounding 8.7% in 2009. As previously mentioned, they are the principal holders of US Treasury debt. China has proven to be buyers when virtually everyone else in the world are sellers. The United States would be wise to stop spending, or we might wake up at the end of this ten-year budget forecast no longer the world economic power.

_________________________________________________________________

(1) Owe No! Debt Ceiling Soars as Dow Sinks – NewYorkPost.com, retrieved February 12th, 2010, http://www.nypost.com/p/news/national/owe_no_debt_ceiling_soars_as_dow_
eFxHhvG7ZwEJpCg1SpZdyM

(2) David Walker, Peter G. Peterson Foundation President & CEO, Testifies Before Senate Budget Committee on Need for Bipartisan Fiscal Commission – pgpf.org, retrieved February 12th, 2010, http://www.pgpf.org/newsroom/MainFeature/senate-budget-committee/

(3) Paulson readies the ‘bazooka’ – CNNMoney.com, retrieved February 12th, 2010, http://money.cnn.com/2008/09/06/news/economy/fannie_freddie_paulson.fortune/

(4) Loan-Agency Woes Swell From a Trickle to a Torrent – NewYorkTimes.com, retrieved February 15th, 2010, http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink

(5) Historical Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/Historicals/

(6) MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES – tres.gov, retrieved February 12th, 2010, http://www.treas.gov/tic/mfh.txt

(7) Budget Summary Tables – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf

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(1) Historical Tables – Budget of the US Government – WhiteHouse.gov, retrieved February 12th, 2010, http://www.whitehouse.gov/omb/budget/fy2011/assets/hist.pdf

At some point, the easy money policies of the Federal Reserve must be reigned in. Let's hope the timing is right.

The easy money policies have some Americans fearing a rise in inflation on the horizon. Combine stagnant growth with inflation, and the wonderful phenomenon known as stagflation is born, another fear percolating for some. To prevent either, Bernanke will have to be very careful with how he tightens financial conditions, reeling in the money supply. In pictures, the money supply looks something like this:

Click for larger image

The gray bars denote a recession, and you can see the vertical rise since 2008. Currency is a medium of exchange which represents a value for goods and services. If the amount of money increases in the economy, so, too, will demand for goods and services, in the long-run. When demand picks up, prices go up. Think about trying to pick up that zombie mask on eBay: the more bidders there are, the higher the price will be. Money is only as valuable as its ability to pay for goods and services. So, if prices increase, it takes more dollars to pay for the same goods and services. This is inflation.

We haven’t seen inflation on the whole during the financial rescue and government stimulus efforts, despite the Federal Reserve’s easy money policies. If you wanted to cherry pick certain assets, the argument could be made that $140/barrel oil, during a recession, coinciding with a dump of liquidity on the economy, could be related. Global oil transactions are denominated in US dollars. It is hard to imagine any other factor being solely responsible for such a historic, and counterintuitive, rise in petroleum during a recession.

But those who fear a rise in price levels say the game isn’t over yet. The amount of money in the economy is only one part of the equation; the rate of money circulating in the economy, the other. Credit is still tight, and economic growth modest. Once bank’s begin lending in normal volumes, and the economy picks up, the possibility of inflation rears its ugly head. Now, who knows when either of those two things will actually happen. The Fed doesn’t know either. Bernanke has been sticking to his guns on interest rate policy, promising low rates for “an extended period”. But he has finally unveiled a game plan for tighter money, albeit without a time frame.

The first phase of his plan will be to offer reverse repurchase agreements to third parties. In effect, the Fed will offer some of its mortgage debt and Treasurys to investors, with a promise to repurchase them at some point in the future. This offers an exchange of paper securities to the investor, and money back into the Fed coffers. I suppose the repurchase aspect of the arrangement offers some insurance to investors who want to purchase US debt and housing debt, two areas of investment I would not be eager to jump into.

The second phase of the Bernanke plan involves selling banks what essentially would be a certificate of deposit. The bank would give the Fed a chunk of its reserves, while the Fed would pay the bank interest. Banks would not be able to count their investment in the Fed as cash or reserves, slowing the process of fractional reserve banking.

If Bernanke pulls too much money out of the economy, too quickly, the economy will suffer. If he pulls too much money out, too late, the economy could hit a wave of inflation. Inflation is not good for business, particularly in a consumption economy. So he’s a central planner who is credited with saving the banks, and the economy from depression. Let’s hope he hits the mark on his plan for tighter money, and with surgical precision.