Posted on 06/06/2010 8:59:15 AM PDT by SeekAndFind
The markets are in turmoil because of worry about the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debts. In Fiscal Crises: The Next Shoe, I opined that Greece is just the canary in the coal mine and that when we look homeward, we have our own huge debt issues, which aren't significantly different from those of the PIIGS countries. I believe that the only reason the European contagion hasn't yet spread to America is because of the dollar’s status as the world’s reserve currency. That era is coming to an end, and it would behoove America to get its house in order.
A May 14, 2010 Barron’s piece entitled We’re Not Greece -- Yet (D. Henniger) referred to a Royal Bank of Canada (RY) study that concluded that “Although the states of California, New York, New Jersey, Massachusetts, and Illinois are comparable in terms of economic output and population to Portugal, Ireland, Italy, Greece, and Spain, RBC finds that states’ debt burden are nowhere near that of the PIIGS.” This, “even after including unfunded liabilities for states’ employees’ pension and other benefits.” As you'll see below, I take issue with the above conclusion, and the first half of this piece will deal with why. Basically, citizens of each US state are responsible not only for the debt burdens of their states and localities, but they're also responsible for their proportionate share of the federal debt. As you'll see, the combination of the two produces debt ratios far in excess of those of the PIIGS.
Table 1 shows the PIIGS data that the markets are concerned with.
Table 2 shows estimates (for fiscal year 2010) of the Population (1), State GDP (2), State Debt/State GDP (3), Local Debt/State GDP (4), Unfunded Pension/State GDP (5), Other Unfunded Benefits/State GDP (6), Total Debt/State GDP (7), and Per Capita Debt (8) for the states mentioned in the Barron’s piece plus Michigan.
Using California as an example, the population is rapidly approaching 40 million, the state’s GDP is estimated at $1.87 trillion, the State Government Debt/State GDP is 7.4%, Local Government Debt/State GDP is 17.2%, Unfunded State Worker Pension Liability/State GDP is 27.8%, Unfunded Other Health and Benefit Liabilities/State GDP is 3.3% for a Total Debt/State GDP of 55.7%. Translating this into Debt Per Capita reveals that every California citizen owes $26,000 for debt or liabilities contracted by their elected officials. Looking back at Table 1, this isn’t too different than the Debt/GDP ratio of Spain. And looking down the Total Debt/State GDP column of Table 2, it becomes apparent that both New Jersey and Illinois have Debt/GDP ratios equivalent to that of Spain.
But wait! Citizens of the states in the US are also responsible for the debt piled up in Washington, DC. So, to the debt of the states and localities, one must add the national debt. The first three rows of Table 3 show an average of all State (row 1), Local (row 2), and Federal (row 3) Debt/GDP and the Per Capita dollars owed by each US citizen.
Using the table, look at the intersection of the "Cumulative (%)" column and "+Agency" row, which represents the recognized public debt of the federal government and its agencies and an average state and local burden. One can see that at 134.6% of GDP, debt burdens are higher than those of all of the PIIGS countries that have given the markets so much heartburn. Table 4 substitutes the debts of the states shown in Table 2 for the "Average State" and "Average Local" and shows the indebtedness of the citizens of these states per capita and as percentages of both State and US GDPs. All of the states shown have Debt/GDP ratios significantly higher than that of Greece.
Now, I'm not an expert on debt levels in European countries. And, it could well be that citizens of those countries have taken on public debt that would be similar to US State and Local debt that isn't in the figures shown in Table 1. But, because the absolute levels of the Debt/GDP shown for the PIIGS have been a cause for concern, then the debts of the citizens of the US, and, specifically those states shown in Table 4, should also be cause for grave concern. For the most part, the European states are at least considering austerity measures. And while some US states are being forced into austerity because of their inability to print money, the major contributor to the indebtedness, the US Congress, doesn't seem all that concerned. This is a major difference from what's occurring in Europe.
So far in this piece I've only talked about public debt. Usdebtclock.org estimates total personal debt at $16.6 trillion, mortgage debt at $14.1 trillion, consumer debt at $2.5 trillion, and credit card debt at $848 billion. (Amazingly, of the four types of private debt, only consumer debt is shown at usdebtclock.org as expanding; the other three categories of consumer debt are contracting. I wish I could say the same about public debt!) So, on top of all of the public debt, each US citizen, on average, owes privately $53,525. Adding the public and private debt together totals $117,181 per capita, or a total Debt/GDP ratio of 248% (see Table 3). Wow! Now that's a lot of debt!
Finally, the unfunded liabilities of Social Security and Medicare are nearly $109 trillion, or about $352,000 per US citizen (see usdebtclock.org). That number alone is a Debt/GDP ratio of 745% and is so outside the realm of rationality that I didn't bother to put it in the table. Clearly, the recipients of these promises can't possibly hope to receive such benefits in current dollars. Depreciation of the currency or significant cutbacks in the promises (or both) is inevitable. The recognition of the real magnitude of these irresponsible promises should be enough to cause a loss of confidence in the dollar. In my view, unless the US moves to at least begin to address these issues, that day is closer than anyone might think.
All of the public debt was originated by governments and most of the private debt by banks or other financial institutions. In feudal times, serfs owed a significant portion of their toil to their lords. Have times really changed? The lords are now the politicians and "Too Big to Fail" bankers. Many ordinary people are serfs, highly indebted either voluntarily (private debt) or involuntarily (public debt). Looking at debt in this way helps to explain the unholy alliance between Washington and Wall Street (see The Unholy Washington-Wall Street Alliance) and why the "Too Big to Fail" and Washington politicians get richer and richer at the public's expense.
While US citizens are drowning in debt, the political system appears incapable of reducing it. In fact, the politicians continue to expand it in the erroneous belief that more debt will help. There are only two ways out: years of austerity or currency devaluation/inflation. The political system won't allow the former. Buy Gold!
-- This article was written by Robert Barone, head of Ancora West. Barone currently serves on AAA’s Finance and Investment Committee, which oversees $5 billion of investable assets. This column was originally posted on AncoraWest's Market Insights.
This is a perfect illustration of the dilemma concerning all economic and financial decisions that must be made. We have successfully been maneuvered into a damned if you do and damned if you don't position mainly by incompetence and inaction over the last 30 years.
He's doing okay until he adds #5 and #6. Why would you compare a liability that's payable over decades to a GDP number that's one year? And if he does that, to show how bad off we are, he needs to add the same liability number to the debt numbers of the PIIGs.
Try again.
“If we want to try and bring back manufacturing to this country we’re going to need some dollar depreciation.”
It will take more than the collapse of the dollar to bring back manufacturing in this country. A factory is a high capital cost investment that requires a long term view to justify the expense. A century ago, JP Morgan (the person) and other Wall Street investors funded factories, ships, railroads and other high cost, long term capital investments that allowed this country to become the strongest industrial nation on the planet. It was that industrial might that saved western civilization in WWII. Had the US industrial base not existed, it is likely the Third Reich and Japan would be ruling the world today.
Unfortunately, the Wall Street banks and investment houses today are populated by speculators with investment time horizons of nanoseconds. Today’s bankers will lend hundreds of thousands of dollars to high credit risk low income people to buy a house with an inflated price but will not consider a loan to a small business for a $50,000 machine tool with the potential to create products of value for several decades. The mortgage loan to the low credit score individual without the income to make the payments is considered less risky than the loan to the small businessman who always pays his/her bills on time. This distortion is due to government policy. Until we change government tax and trade policies to favor long term investment in productive manufacturing assets, we will continue to fritter our national savings away and fail to create the infrastructure required for a strong middle class.
I respectfully disagree.
Government workers make twice what private sectoir workers make.
And the benefits and pensions are astronomical.
By cutting entitlements, the federal budget and eliminating whole departments and programs altogether and reducing the size and scope of the federal bureaucracy and channeling the savings into more productive areas would boost the economy, not threaten it.
Not really. It’s easy for someone who hasn’t studied to ratchet off that talking point but it isn’t true.
Most government offices are filled with clerical staff that make in the 30k-40k range. I’m not saying that there aren’t those who advance far beyond that but most of your office employees in a federal office will be in that range.
Plus, federal workers essentially make a lifetime commitment to the government and forgo higher private sector wages in exchange for the better benefits, insurance and pension. If you try and take that away from them the streets of every city with a federal courthouse will look like Athens because there are more families then you realize now depending on the stable income of the family member who has the federal job.
I don’t recall Reagan laying that many people off in 1981. What he did was cut the top tax rates that began to start spurring economic investment.
But, I also don’t need to remind you that the recession continued through 1981 and 1982 and by early 1983 unemployment was worse then it ever was under Carter and Reagan looked like a dead duck.
Reagan got a second term because when it started picking up in late 83 it picked up fast and furious and he had the distinct advantage of getting Fritz Mondale as his opponent in ‘84.
I’m not saying CUT ALL FEDERAL WORKERS.
I AM SAYING CUT OUT THE ONES THAT ARE NOT PRODUCTIVE. CLEAN HOUSE. I USED TO WORK FOR THE FEDS. I KNOW WHAT GOES ON. ONE THIRD OF ALL FEDERAL WORKERS DO ALL THE WORK AND THE OTHER TWO THIRDS SKATE BY BY DOING THE BARE MINIMUM AND NO MORE. THEY KNOW WHO THEY ARE AND THEIR CO WORKERS KNOW TOO. IT IS RATHER THE UNIONS AND THEIR BOSSES THAT PROTECT THEM FROM BEING FIRED OR LAID OFF. THAT IS WHAT THE FEDERAL BUREAUCRACY IS ALL ABOUT. THERE IS A LOT OF WASTE FRAUD AND ABUSE IN THE FEDERAL BUDGET THAT COULD BE CUT WITHOUT BATTING AN EYELASH.
Similarly, the Canon 1D MK IV camera is $1000 more than it's predecessor, the Mark III. Canon strives to make the new version of a camera match the old version in price. Canon and Nikon are in a blood war for the high end professional camera market, and keep each other honest on price.
The clowns in Washington are printing money as fast as they can (or adding numbers to the database) and the Arabs and N. Koreans are counterfeiting money.
They can control the rate of exchange, but foreign manufacturers will raise the price of products, regardless of what the governments dictate.
Not any more. The average federal worker's salary is now $71,000, compared with $40,000 in the private sector. And that's before benefits.
In the last 18 months the number of federal workers making more than $100,000 went from 14% to 19%.
Federal pay is completely out of control.
Is that mean or is that average?
I’ll give you an example. Here is firm A
300 workers make $35,000 a year. They are overseen by $100,000 making managers and there’s 100 of them (I know that ratio is less than realistic but I’m making a point here)
Now, the 100 managers make $10,000,000 combined and the workers they oversee make $10,500,000 combined and you get a total payroll of $20,500,000. Now, take that and divide it by 400 and you come up with $51,520.
Now, no one in that firm is making $51,520 but thats the average salary because that’s how you calculate a salary.
A far better guide of what salaries really are would be to find the mean but to compute the mean would require every salary stub in America and would be far more difficult to accomplish. No one wants to do that work. It’s easier to get the broad based average.
There are many overpaid federal workers but most of them are those who have some kind of advanced degree and who’s degree was the main qualifier for their job. I have had neighbors who were federal workers and I’ve had some business associates with federal worker wives.
For every 1 federal worker making $150,000 a year you have 5 office ladies at GS-5 making around $40,000. And an interest note, if you run up those numbers you come up with an average of $70,000.
Averages are a great statistic to use in many areas, but incomes for sector workers has always been known to be a bad one. Like with attorneys. Yes, the average salary for attorneys is around $100,000 but that’s only because you have a lot of 2 mil + attorneys canceling out all the shingle guys who struggle to bring in 60k in a year and apply that same rubric to any profession including medicine.
A far better determinant is mean salary but somehow I doubt any of us will do the work to determine the mean.
Eventually the idea would be that this would make foreign products untenable in the American market driving foreign producers to either produce in America to continue accessing our market or it would drive domestic interests to start bringing back manufacturing.
Most people seem to think we don’t have manufacturing capacity. We have a lot of equipment in old manufacturing plants just dying to be used if their was demand. Our manufacturing sector is dead because we simply can’t be profitable doing it.
A depreciated dollar could reverse that trend.
Median annual salary: Federal: $66,591, Private: $55,000, Difference: $11,091.
From BLS statistics. Federal Pay Ahead of Private Industry (USA Today)
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