Month: July 2011

This isn’t the type of website that tracks closely to the news, but this reported leak by the Administration bears notice. 

A recent post was about some commentary that I’m hearing from people to the effect that a federal default might not be such a terrible thing and one of my own observations was that come the early August period, there would still be money to pay some bills.  The government would then be in the position of more than a few average Americans, who have to prioritize their bills and decide what gets paid first.  One of my great interests would be who gets paid with the available funds and who gets stiffed.

Bloomberg is now running a report by an unnamed Administration official that if the debt ceiling is not raised, then the Treasury Department would assure that the bondholders – frequently foreign creditors and the banking system via the Federal Reserve System – would receive payment ahead of others.  Honestly, I’m not certain whether there’s legislation that mandates that bond payments supersede other payments but the simple reality is that the US government will give precedence to creditors who own US bonds which mature during that period.  Frankly, it doesn’t matter even if such legislation exists because the government should never have reached this ridiculous state of affairs.  This might simply be a leak to ratchet up pressure upon the Congress, whose members will hopefully fear that the public will blame them for all manner of missed benefits.  But it points out two salient things:

• The administration refused as recently as a month ago to specify any order of payments, which they apparently now think makes a major difference in whether some compromise – meaningful or not – is reached.
• The US government has officially placed the American people on notice that bondholders and creditors will be given priority over the citizenry. 

So there it is.  If you want the government to give a damn, make sure that you lend them some money beyond your taxes.

The title quote is from a college student that I’ve known since his elementary school years and encapsulates what I think that many are now starting to think.  Ron Paul just opined about the possibility and it’s making the rounds of the internet.  Just default and let’s get this over with.  Now.  But what precisely is meant by default on August 2?

Let’s consider this from a micro level, the level at which millions are operating when they have to decide whether to pay the mortgage, buy food, or continue to provide the electric and gas for the everyday life.  The United States Government is about to get a glimpse of life for the average Joe and Jane who are struggling to make ends meet since they had their jobs outsourced to China and India, and judging by the verbiage, they are terrified.

Good.  The members of the Congress and Executive Branch deserve to be scared.

First, there is still money flowing into the federal household but with the way that the bills and payments are hitting, there’s going to be a cash shortfall.  The federal household has a large amount of less-liquid assets – Rolexes, fine china and a monster set of exercise equipment – but there’s no longer any federal money market account on which to rely and the emergency fund is exhausted.  They could sell the assets but anybody who recognized the need would take it for too great a discount and besides, it would both take too long as well as look bad.  And if we got rid of all of the land that Great Uncle Teddy left us, it would be a tragedy.  The creditors have continued to provide credit since the payments have been made to date but come August 2, the minimum payment due will fall on the same day that the cash flow is negative and all of the other bills are due.  Barry and John have bickered and argued, yelling epithets at one another as they bang on the granite countertops and tossed the occasional cup of Starbucks at one another.  So if there’s still some money available but a raft of bills, what to do?

Make a priority list of what has to be paid and then work through the various permutations.  Let’s see, now.  The parents exhausted their savings on educating us and we’ve got to help them each month with a monthly stipend.  The kids have all of their various activities as well as the stuff that we have to provide for them, such as food, shelter and the medicine cabinet full of medications.  There are the multiple club memberships, dues and charities which we support and God knows that some good comes from that.  Don’t forget the security that we pay for since the neighborhood has gotten a bit rougher and seedier; we need to have access to strong security.  So how do we cut? 

In the real world of repo’d cars, terminated utilities and food stamps, people would at one time have considered missing some credit payments.  But the cash flow is so weak and the choices so stark, that more people are unwilling to let the credit go.  The business community has noted for the first time that folks will willingly let go of the mortgage while continuing to pay the monthly credit card bill and it’s recently reported by a Data collection agency that more of the monthly revolving credit – nearing 10% – to pay for necessities instead of discretionary items.  But like Frank Herbert’s Planet Arakis, the spice must flow and people now believe that credit must flow as well.  What does happen if we miss the revolving credit payment?

We’ll certainly get a nasty letter and probably a phone call from the bank since we missed.  The tone and content of the discussion will be ugly and it’s going to be embarrassing in the extreme.  The bank in turn depends on us for it’s own asset quality and dividends to large number of investors, but we’ve never missed a payment until now and besides, what else is out there in the world of credit quality?  No, we’re safe in our own house and the security devices and service will keep us from being evicted.  But what will happen is that our interest rates will go up appreciably since the bank is going to ratchet up the pressure on us; after all, it’s not like there are a lot of solid creditors around nowadays, either.  The value of our intangible assets will also take a massive hit so that our good name and reputation are sullied in the eyes of everyone else that could provide credit for us and with no new income streams – it’s not like royalties manufacture new income streams – our cost of borrowing there will also go up and do so significantly.  The impact upon our neighbors will also be considerable since everybody has depended upon our spending to keep themselves in relatively decent shape – the domestic help, the coffee shop and don’t forget the personal chef.  Net basis, we can get through but we’re going to finally have to make some decisions about how we allocate money to the creditors, our parents and the kids.  Otherwise, if we stiff the creditors again, they’ll truly cut off the funds and we’ll be screwed.  As ugly as it is, what else is there to force us to make the decisions that must be made?

That’s an idea of what goes on at the personal level and there’s acknowledgement that the Federal Reserve is working with the Treasury Department to likewise determine what the priorities are and whose check is honored when the default arrives.  But what interests me most is the order of priority and which payments are honored.  Do our servicemen receive their pay and will the elderly continue to receive their benefits?  Will our 45 million recipients of SNAP benefits be able to continue purchasing food?  Or will the foreign creditors be paid at the expense of the citizenry?  Talk is ultimately cheap and it’s these actions that will indicate what the politicians truly believe and hold most dear.  What do we owe each of our constituent groups – foreign and domestic?  What else will finally force us to make the choices?

When Middle child and I spoke of this earlier this evening, I remarked that no matter what happened, the sun would rise and set and we’d manage to continue having food upon the table.  What I didn’t say was that if we didn’t default and finally deal with the issues, we’d probably have food on the table but it was increasingly unlikely that he’d be able to put food on the table for his own unborn children.

There’s been much written on the decline of the American Middle Class, facing it’s worst time perhaps since the Great Depression.  The statistics point out falling income, insufficient assets to support the classic American notion of ‘retirement’ and a significant number of people who owe more on their house – their largest asset – than it could ever possibly again be worth.  But while everyone is focusing on the economic aspects, as though the number of bedrooms is paramount, what’s being overlooked is that the true danger to the American middle class lies in the political realm.  It’s a misdirection that has to be corrected since we’ve long ago crossed from the purely economic into the political realm and I’m not certain that many realize that fact.  The protests in Greece and Spain demonstrate that there comes a point at which the consequences of ‘economic’ decisions are addressed in a purely political manner as the governments in power attempt to fend off the masses to continue in power.

One of the criticisms of the economics profession is that economists have tried to wrap a soft, inexact science in a hard science shell.  Economics is at its heart the determination of how resources are allocated and used to the best effect; this is itself a political question as perceptions and emotions come into play as much as pure numbers.  This packaging however, has carried over into today’s society in general as the news programs spend their time throwing numbers around, mesmerizing the audience with the sheer volume of information.  Certainly, if we can track this data and put it into neat numeric formats, then there must be a rational and easily obtainable answer, as though juggling the various economic variables were the same as adjusting recipe ingredients for Chef Ramsey.

Today’s American economy is notable by the disproportionate size of the financial sector and huge federal deficits, incurred to help the Too-Big-To-Fail financial institutions from their self-inflicted injuries.  These injuries didn’t arise from economic circumstances, but actually from political actions that backfired.

• Excessive and unmonitored risks were taken by these commercial and investment banks because no one was paying attention to them.  No one paid attention to them because of a political action, the repeal of the Glass-Steagall Act, which had successfully regulated the financial services industry after the last debacle of the Great Depression.
• The repeal of Glass-Steagall was made possible by massive campaign contributions to Congress from the financial services industry, a political activity which hasn’t been satisfactorily regulated since God alone knows when.  What’s infuriating is that at this juncture, corporate campaign contributions can’t be successfully limited because the Supreme Court has ruled that it infringes upon their right to free speech.
• Much of the job loss that’s plagued us is attributable to a blind, single-minded devotion to free trade regardless of the trade policies of the other nations, whose own policies might permit dumping, currency-pegging and inhumane working conditions.  This is mandated in political treaties which coincide with the economic theories that spawn them.
• The economic response to the 2008 collapse of Lehman and the near collapse of the economic system was the passage of TARP, a purely political act.    This unpopular act occurred despite widespread civic opposition and with the additional input from the Treasury Secretary – a financial/economic personage – that failure to pass the legislation would probably result in widespread civil unrest and the imposition of martial law, a completely political act.
• There has been significant evidence provided that the federal government and the Federal Reserve are involved to some extent in the actions of the equity markets, a purely political act to maintain a semblance of normalcy for the general public.

The effect of these, and other, political acts is to move the government from regulator for the common good to that of co-conspirator with a corrupted and self-serving minority and this is probably the greatest threat to the American Middle Class instead of falling wages and job losses.  The strength of the American Experience has arisen from a shared sense of common values, as laughable as that might seem to certain cynics.  These values include hard work, collective honesty and most importantly, a respect and belief in the rule of law.  For all of its flaws, there had been a common belief that the Constitution and Bill of Rights were the mainstay of the nation and that the laws were generally just and would ultimately win out to the benefit of the whole.

• When corporations are found to have broken the law and the penalty is a mere fraction of the illegal proceeds with no other correction to the offenders, the common values are destroyed.
• When banks are found to undermine ancient common law principles by wholesale forging of foreclosure documents, attesting to the veracity of information that they know to be wrong, the common values are destroyed.
• When banks are found to further undermine the law by subverting the role of the notary public – having employees sign the signature of someone who’s dead – and with no meaningful legal response, the common values are destroyed.
• When companies and firms betray their fiduciary interest, face-ripping clients and misdirecting innocents into needlessly risky investments, the common values are destroyed.
• When the government is seen to act as enabler to these same companies and individuals, refusing to let them pay the penalty for their actions, the common values are destroyed.
• When the President and Speaker of the House are seen to be playing golf while the government is mired in budgetary and debt morass, the common values are destroyed.
• When two parents work multiple jobs to provide basics for their children while millions are paid out to corporate executives as the payoff for failed plans and lost jobs, the common values are destroyed.
• When a father has to explain to his child why his refusal to do something just because everyone else is doing it isn’t dumb, the common values are destroyed.

I’ve resigned myself to the fact that this country is going to face economic turmoil, unseen since the days of the Great Depression.  I’ve worked to teach the kids real world lessons about money, credit and values to prepare them for their future in a world with much greater competition and fewer resources.  But I will not resign myself to the notion that my children – and all of their friends, classmates and peers – are condemned to live as second class citizens serving as debt serfs to the benefit of a privileged few.

That does not come as the result of economic actions, but political ones.  The work now will be to relearn what was once known amongst our forebears, but since forgotten.

When you’ve planned and saved for more than two years for a "once-in-a-lifetime" family vacation, you want everything to go off and it was no different for the recent vacation to Italy and Greece, aka The PIGS Tour.  But the latter part of the trip involved several days in Athens and it was while we were in Rome that global news caught and showed footage of the rioting in Athens’ Syntagma Square, outside of the Greek parliament and we were left wondering – well, me actually – at what point we pull the plug on the latter portion.  With two teens and a child, precisely when does it become unsafe to travel there?  Even if it’s physically safe, is it justifiable to take the kids to see a politically polarized site during what’s supposed to be a "get away from it all" experience?

If you’ve been out of town for awhile, the nightly protests in Syntagma Square are the public’s response to multiple factors, mostly the Parliament’s move to adopt painful austerity measures in order to obtain the next portion of the European bailout money to the tune of about 15 Billion Euros.  In this case, the Parliament voted to adopt the measures while we were in Italy and it was during this time that things spiraled out of control for an evening.  Although we left our computers and most of the cellphones at home, I still took a few moments on hotel computers to check the State Department website and find out if there was any travel warning, which there wasn’t.  Our tour guide, a multi-lingual German woman, called a colleague in Greece and passed along that any issues were localized solely to the Syntagma Square vicinity; the remainder of Athens and the rest of Greece weren’t experiencing unrest.  The final point was a review of our travel insurance policy.  We discovered that the policy doesn’t cover changes due to civil unrest and we would not be reimbursed for the prepaid costs of hotel/flight should we choose to dump any part of the Greek segment.  Fortunately for us however, it did reimburse us for the cost of emergency evacuation.  Great.  I’ll get back the 15000 Euros that I had to put on the credit card for the taxi to the airport evacuation site…Given all the factors, we were in for the trip and fortunately for us, things had calmed down by the time we were to leave for Athens.

The ride from the airport to our hotel took more than a half hour and we talked with our driver, an engaging middle-aged Greek gentleman, who explained some of the average Greek’s perspective of the economic difficulties.  The politicians from both parties have had 40 years to screw things up and they’ve succeeded.  The demonstrations are the work of the communists, damn them.  We’re screwed…When my wife inquired about finding a decent taverna where the locals eat, he directed us to a city section called Plaka, one of the earliest residential sections of modern Athens and located immediately at the base of the Acropolis plateau;  he stated that we could find any number of decent restaurants there without all of the tourist schtick.  After we checked in and unloaded our bags, we studied the map and found that Plaka was perhaps 1.5 km due west and immediately on the other side of…Syntagma Square.  Since it was still in the mid-afternoon, and the cabdrivers were on strike that day, we thought to hell with it and hoofed it westwards.

The square itself was anticlimactic at that hour of the day.  We walked west along Leoforos Vasilissis Sofia, a main thoroughfare notable by some museums, an embassy and attractive apartment buildings and we only became aware that the square was coming up by the increasing presence of one or two policemen, with another carrying a submachine gun another block ahead.  In the distance, a block away from the square was a dark blue school bus that had carried in the riot squads, who were clustered along the fence of the National Gardens as they kibbitzed and smoked.  At the corner with Leoforos Vasillis Amalias, on the left,  was the Parliament building with the Memorial to the Unknown Greek Soldier on the side facing Amalias.  Across Amalias from the tomb was Syntagma Square, notable by the number of banners and posters hanging up.  The great majority of these signs were in Cyrillic and a handful of early protestors milled around as though they were awaiting the opening gate for a concert, chatting and smoking as well.  When a handful sitting nearby did start a chant, a cellphone would ring and one of the chanters would answer it and sit down to chat with the chant dying away.  We continued through the square and as I started to doubt the big deal, we passed another building whose front window had been shattered, apparently by a brick.  Other buildings suffered minor damage such as graffiti and cracked windows, but these became fewer and farther between as we moved away from the square.  Our after-dinner return was much closer to when things began and it was at this point that we saw the street between the square and the Parliament cordoned off to traffic as the number of protestors had swelled.  Ahead of us was a shoulder-to-shoulder line of several dozen protestors, each of whom was wearing a plain mask, albeit not the Guy Fawkes mask from the movie V For Vendetta.  As it turned out, they were lined up for a photo op and when the photographer was finished, they removed their masks and dispersed in knots and it was then that I realized that some of the protestors were actually children, some younger than my youngest child. 

When we asked a protestor what was being yelled, the laconic response was they’re yelling against the government and he then simply walked away.  Two young policemen on the corner, dressed in simple outfits and leaning on plexiglass riot shields, were more talkative and explained some of what we were seeing.  The protestors began to arrive in greater numbers at about 6 PM and they would finally disperse around 5 AM and excepting the televised coverage, the crowds had been peaceful for the remainder of the nights.  As we spoke, they went on to say that while the riot troops were available in case of problems, they were generally out of eyesight so as to not provoke additional difficulties and their own job was to assure that some order was maintained.  Honestly, the cops were friendlier and more talkative than the protestors as we had further conversations with the riot police further up the block; one of them even joked with Youngest, who was a bit uncomfortable in the presence of real automatic weapons.  It was a very different proposition to see a fully operational submachine than the Nerf and virtual weapons wielded while playing online and with friends.  The remainder of the hike back was uneventful, apart from seeing a sandbag gun emplacement hidden behind the trees of the National Gardens, and when the next morning rolled around, there was no second thought about safety and we again returned to that vicinity. 

For all of the talk and news coverage, it really was a non-event and honestly something that I’m glad that the kids got to see.  There was serious discussion about what’s causing the unrest and I’m gratified that when we spoke with Greeks, all three listened.  One of my personal goals for the trip was to help the kids understand that there’s far more out there than what they see in smalltown America.  Likewise, they need to see that there is such a thing as non-violent protest as average people vent their anger at those in power when the standard channels become uselessly dysfunctional.  Because when push comes to shove, my fear is akin to the old saying:  As we once were, you are now.  As we are now, you will become.