Wednesday, March 4, 2009

Inflation Post Follow-up

There are a couple of interesting articles that appeared very recently that seem to point to high inflation (and high taxation) in the years to come. The first one is in the WSJ, and is entitled "Washington Is Quietly Repudiating Its Debts." The gist of the article is that we might be already at a point of no return in terms of indebtedness, and the only way out (short of an outright default imo) is through inflation. Also mentioned are the new spending programs and FNM and FRE, now on balance sheet. Couple of good quotes:
"As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use."
"The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury's guarantee, now explicit. But no one has ever seriously assessed the Treasury's creditworthiness with Fannie and Freddie on its books. The public guarantee is entirely open-ended and unbounded."
"We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation."

Remember Lenin's attack on the bourgeois via the "double grindstone of inflation and taxation."

The second article is a nice piece from yesterday I think on Bloomberg on the upcoming pension crisis. Now the public pension bomb has been cooking for a while and it has been under the radar with small exceptions (San Diego, NYC transit as examples). Many private companies have already sharply curtailed their pension promises. The public sector for various reasons (accounting, unions, elected officials and voter blocs) have not. Well, guess what? The next currency-destroying mega bailout will be in the pensions space. No elected politician will say "no" to "helping" "safety personnel" and "teachers" and similar employees on the tax payer dough. Some juicy bits:
"Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion. "
Remember bonds=future taxation
"That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show. "
Now this would be a capital offence in my book:
"In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent -- 70 percent less than what the fund was paying for the loan. "
Or these geniuses:
"The government of Puerto Rico borrowed $2.9 billion through pension bonds in 2008, betting that it could reap annual returns of 8.5 percent investing the money, while paying its bondholders 6.5 percent."

“The risk is minimal,” says Jorge Irizarry, who was chairman of the Employees Retirement System of Puerto Rico from August 2007 through December 2008."

“There are accounting gimmicks in pension land which create economic fictions and which disguise the severity of the real problem,” Kramer says. “Unfortunately, pension board members don’t have much of an appetite for disclosing inconvenient truths.”

While I was looking for the retirement article, something else popped up on Bloomberg.
"Yale University said it will cost undergraduates at Yale College 3.3 percent more to attend next academic year, joining fellow Ivy League and other selective universities in raising tuition and cutting budgets in the face of declining endowments.

Undergraduates will pay $47,500 in 2009-10 for tuition, room and board, the school in New Haven, Connecticut, said yesterday in an e-mailed statement. The current cost is $46,000, an increase of 2.2 percent from the 2007-2008 academic year."

Remember, there is no inflation! We have to inflate because deflation is bad.

To put the numbers in perspective, $48k is about the median US household income. I know it is only a list price but think about it. 48k, taxation at about 25%, housing at about 30%, food at about 10%, leaves 16.8k/year. So for 2 kids x 4 years x $48k/$16.8k/yr is almost 23 years of work. Do you think it is a problem?

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