Thursday, March 28, 2013
Going to re-visit the crisis in Cyprus again. Last week, we mentioned how depositors were having their accounts "taxed" to help fund the bank bailout in that country. The original agreement has be modified to confiscate, uh, tax only those accounts that have over $100,000 Euros in them. One can argue the fairness of this action given that leaders in Cyprus had been asking for help from Brussels for over a year with problems in their banking system, but the fact remains that depositors are going to shoulder some of the load of bailing out mismanaged banks. But here is the point that I want to focus on now: the Dutch Chairman of the Eurozone, Jeroen Dijsselbloem, has said that what has happened in Cyprus would be the template for dealing with future banking problems across the European Union. If so, that precedent is troubling. While Cyprus is a small economy and nation, there are serious and much larger problems looming with Italy and Spain. If depositors fear their funds will be taken to help recover losses in a mismanaged bank, we all know what happen. The inevitable run on the entire banking system begins. When depositors lose confidence in their bank and their country's banking system, the resulting fallout can be catastrophic. It will be interesting to see how the EU responds to future upheavals and if those disruptions create problems across the globe.
The doctor said I could go off my diet and eat whatever I want. Also, I am calling myself "doctor" now.
Stephan Goss, the Chief Actuary for Social Security, recently released a detailed report on the status of the Disability Fund. In a report delivered the the House of Representatives, Goss said that the Disability Fund was going broke in the near future, due to less revenue coming in and an all time high for people receiving disability income. According to his report, to keep the Disability Fund solvent, there would need to be a cut in benefits of 16% or an increase in payroll taxes of 20%, neither of which are palatable to Congressional leaders. So what to do in the face of a difficult decision? What Washington always does when facing intractable problems: kick the can down the road. There is a proposal to tap funds in the Social Security Retirement Fund to help fund the shortfall in disability payments. This would result in approximately $40 billion per year being removed from the retirement side and transferred to disability recipients. Now you are smart folks, and you have probably already figured out that this will shorten the life span of the retirement payments if it is implemented. Friends, there has been no honest discussion about the true financial condition of these programs, and it is time that we start being honest. Waiting to do so only means that the pain of fixing these programs gets worse.
I asked my trainer at the gym what machine I should use to impress the pretty girls. He looked at me and said, "The ATM outside."
We all have lived in the Federal Reserve's "zero interest rate policy" (ZIRP) for the past 4 years. While this has been a boon for home buyers that finance their homes or borrowers that take on debt, there have been other not so positive consequences. For instance, savers and bond buyers have been getting smashed by the low interest rates and their income has suffered. The effect of ZIRP on pension and retirement plans has been negative as well, as these plans typically are required to hold a portion of their assets in fixed income (bonds, CD's) and those investments are yielding very little. But here is the other side of ZIRP that many of us have missed: that policy allows Washington to borrow money- LOTS of money- with no apparent cost. Although we have increased our nation's debt by over $3 trillion dollars (and rapidly heading toward $4 trillion), the impact has been barely felt in the economy because of the low interest rate environment. Let interest rates begin to rise (and they will) and the Federal Reserve have to roll over the debt (they will not be able to pay it back at maturity) and all of a sudden, the amount of interest that we are paying on our debt will consume a greater portion of our nation's tax revenue. Couple that with a massive and growing entitlement program, and you can see the problems ahead. I just hope that someday, those in Washington will too.
I wonder if vegetarians can eat animal crackers?
And that, my friends, is my view.