Municipal bonds seem safe. But the incredible long period of irresponsible spending and taking on long term liabilities (pensions, health care costs, infrastructure to maintain) and low taxes and selling off future income streams (to consume today) leaves those bonds with questionable financial backing in many locations. Municipal bond investments should be examined more closely today in light of the problems in the market.
Video shows the State Budgets: The Day of Reckoning by 60 minutes.
Wave of Muni Defaults to Spur Layoffs, Social Unrest: Whitney
Muni experts, including an analyst from Standard & Poor’s, dismissed her predictions, saying the numbers don’t add up.
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“States clearly have been funding municipal governments—for now up to 40 percent of their total expenditures,” she explained. “As the states become more compromised from a fiscal standpoint, that funding is going to end.”
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Whitney added that it’s way too soon to see muni bonds as a buying opportunity. But she said that can change quickly.
“When you start to see the first major defaults in this area [the states and cities], when you see more defaults and indiscriminate selling—if you do your research now and figure out who’s protected where and which revenues are protected, there will be great buying opportunities,” Whitney said.
“People are complacent about these defaults. The news about all this isn’t out there yet,” Whitney went on to say. “And only when it is out there, then there will be a buying opportunity [for munis].”
Related: USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – NY State Raises Pension Age to Save $48 Billion – What the Bailout and Stimulus Are and Are Not – posts on bonds
The world today has a much different economic landscape than just 20 years ago. China’s amazing economic growth is likely the biggest story. But the overwhelming success of many other countries is also a huge story. Today it is not the developing world that has governments spending taxes they promise their grandchildren will pay, but instead the richest countries on earth that choose to spend today and pay tomorrow. While “developing” countries have well balanced government budgets overall.
The chart shows gross government debt as percentage GDP from 1990-2009. By Curious Cat Investing and Economics Blog, Creative Commons Attribution. Data source: IMF___________________________
There are plenty of reasons to question this data but I think it gives a decent overall picture of where things stand. It may seem like government debt should be an easy figure to know but even just agreeing what would be the most reasonable figure for one country is very difficult, comparing between countries gets even more difficult and the political pressures to reduces how bad the data looks encourages countries to try and make the figures look as good as they can.
The poster child for irresponsible spending is Japan which has gross government debt of 218% of GDP (Japan’s 2009 figure is an IMF estimate). Greece is at 115%. Gross debt is not the only important figure. Government debt held within the country is much less damaging than debt held by those outside the country. Japan holds a large portion of its own debt. If foreigners own your debt then debt payments you make each year are paid outside your country and it is in essence a tax of a portion of your economic production that must be paid. If the debt is internal it mean taxpayers have to support bond holders each year (but at least when those bondholders spend the money it stays within your economy).
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Law enforcement officers, pre-Kindergarten through 12th grade teachers and firefighters/emergency medical technicians can contribute to community revitalization while becoming homeowners through HUD’s Good Neighbor Next Door Sales Program. HUD (United States Department of Housing and Urban Development) offers a substantial incentive in the form of a discount of 50% from the list price of the home. In return you must commit to live in the property for 36 months as your sole residence.
Eligible Single Family homes located in revitalization areas (there are hundreds of revitalization areas across the country. HUD is always working with localities to designate new areas) are listed exclusively for sales through the Good Neighbor Next Door Sales program. Properties are available for purchase through the program for five days.
Check the listings for your state. Follow the instructions to submit your interest in purchasing a specific home. If more than one person submits on a single home a selection will be made by random lottery. You must meet the requirements for a law enforcement officer, teacher, firefighter or emergency medical technician and comply with HUD’s regulations for the program.
HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this “silent second” provided that you fulfill the three-year occupancy requirement.
Related: Fixed Mortgage Rates Reach New Low – Your Home as an Investment – articles on home ownership
U.S. Investors Regain Majority Holding of Treasuries
Mutual funds, households and banks have boosted the domestic share of the $8.18 trillion in tradable U.S. debt to 50.2 percent as of May, according to the most recent Treasury Department data.
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The biggest jump in demand this year among domestic buyers of Treasuries has been commercial lenders. Bank holdings of Treasury and agency securities increased 5 percent to $1.57 trillion last month, according to the latest data available from the Fed.
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The Fed’s decision to hold its target for the overnight lending rate at a record low has made it possible for banks to borrow at near-zero interest rates to finance purchases of longer-term and higher-yielding Treasuries while lending less.
I must say, unless you are getting special government interest free loans to invest in treasuries (like those that caused the credit crisis are) it seems crazy to me to invest at these low rates. In retirement, it probably does make sense to have some just as a diversification measure but other than that I would certainly reduce my holdings from what they would have been 10 years ago.
If politicians or the fed would just give special favors to me to borrow billions and essentially 0% and then lend it back for more I would take that deal.
But if I am not granted the welfare Chase, Goldman Sachs, Citibank and the rest are (with huge amounts of free money and bailouts if their bets fail) buying extremely low yield government debt is not an investment I want. I don’t think betting on deflation is not a bet I want to take. Inflation seems a bigger risk to me. But people get to make their own decisions, and we will see which investors are right.
Related: Paying Back Direct Cash from Taxpayers Does not Excuse Bank Misdeeds – Can Bankers Avoid Taking Responsibility Again? – What the Financial Sector Did to Us
Alan Greenspan made several huge errors while chairman of the Federal Reserve. Failing to deal with the massive risk taking and fraud by the member banks of the Federal Reserve was one. And supporting tax cuts for a country that was hugely in debt (while current deficits were still huge was another. Yes anyone can claim (and he did) future surpluses, but there had yet to be a single year of surplus, and obviously we would have been in deficit even before the tax cuts put us much much further in debt, history has shown .
That is either amazingly bad economic forecasting or a lie. My guess is he knew this wasn’t true. Which would make it a lie. If he really was that out of touch with economic reality, we have to question why we ever thought he had insight into the economy.
Greenspan Says Congress Should Let Tax Cuts Expire
GREENSPAN: I should say they should follow the law and let them lapse.
WOODRUFF: Meaning what happens?
GREENSPAN: Taxes go up. The problem is, unless we start to come to grips with this long-term outlook, we are going to have major problems. I think we misunderstand the momentum of this deficit going forward.
Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household
Accepting that, I don’t agree with those that vilify his performance. He was Fed chairman from 1987-2006. He made some very bad decisions that cost people dearly. But it isn’t very surprising someone in such power for so long would make some very bad and costly decisions. My guess is he caved to pressure from political allies that reminded him how the current President Bush’s father blamed Greenspan’s decisions for his losing the Presidency. And so Greenspan was trying to do what he could to do what the then President Bush wanted. Not a very honorable explanation but people often do not make the most honorable choices.
In 2003 he publicly disagreed with the wisdom of additional cuts:
Politicians, eager to give favors, at the expense of the future, went ahead and passed more tax cuts – weakening the country for their (and their political allies) short term benefit.
Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household
Greenspan’s thoughts on the economy, from his July 16th 2010 interview:
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Buffett Expects “Terrible Problem” for Municipal Debt
Berkshire’s investment portfolio included municipal bonds valued at less than $3.9 billion as of March 31, down from more than $4.7 billion at the end of 2008. The company had a maximum of $16 billion at risk in derivatives tied to such debt, according to the company’s annual report for 2009.
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Buffett said last month that the U.S. may feel compelled to rescue a state facing default after the government committed $700 billion to bail out financial firms and automakers. “It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,”
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About $14.5 billion of municipal bonds defaulted in 2008 and 2009… Many those were securities backed by revenue from nursing homes, property developments and other projects without claim to government tax revenue.
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Defaults by local governments with the power to raise taxes are less common. Jefferson County, Alabama, defaulted on more than $3 billion of bonds backed by sewer fees after the deals grew more costly in the wake of the credit crisis in 2008. Vallejo, California, filed for bankruptcy in 2008 after its tax revenue tumbled.
Related: USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – Buffett on Need to Reduce Government Deficits – Politicians Again Raising Taxes On Your Children
Failing to pay for the deferred costs of current expenditures gets all those practicing credit card budget thinking in trouble. That includes lots of individuals. But it also includes many governments. They pay huge rewards to special interests and act like they think the cost doesn’t exist. Only an extremely financially illiterate society could elect so many of these people. We have not learned that in the modern financial economies financial illiteracy is a huge societal problem (along with scientific illiteracy).
Padded Pensions Add to New York Fiscal Woes
Such poor financial management by public sector organization (California is horrible also) are causing huge damage to those living in such poorly managed states.
The use of public money for outsize retirement pay really stings when budgets don’t balance, teachers are being laid off, furloughs are being planned
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Roughly one of every 250 retired public workers in New York is collecting a six-figure pension, and that group is expected to grow rapidly in coming years, based on the number of highly paid people in the pipeline.
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Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.
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Before Yonkers adopted a richer pension formula for police in 2000, for instance, it was told the maximum cost would be $1.3 million a year. But instead, the yearly cost is now $3.75 million and rising. David Simpson, a spokesman for the mayor of Yonkers, said pension cost projections were “often lowballs,” so the city could get stuck. “Once you give something, you can’t take it away,” he said.
It isn’t complicated. So long as you elect people that are financial illiterate and only care about granting favors to special interests, not the consequences of doing so, you are setting yourself up for a great deal of pain once your credit card bill comes due.
Related: NY State Raises Pension Age to Save $48 Billion – Charge It to My Kids – Bogle on the Retirement Crisis – Politicians Again Raising Taxes On Your Children
Roubini Says Rising Sovereign Debt Leads to Inflation, Defaults
“The thing I worry about is the buildup of sovereign debt,” said Roubini
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If the problem isn’t addressed, he said, nations will either fail to meet obligations or experience higher inflation as officials “monetize” their debts, or print money to tackle the shortfalls.
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“While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,”
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Greece “could eventually be forced to get out” of the 16- nation euro region, he said in a Bloomberg Television interview yesterday. That would lead to a decline in the euro and make it “less of a liquid currency,” he said. While a smaller euro zone “makes sense,” he said, “it could be very messy.”
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[Roubini supports] a carbon tax on gasoline, with Roubini saying it would reduce American dependence on oil from overseas, shrink the trade deficit and carbon emissions, and help pay down the U.S. budget deficit.
I agree that the damage done by those (which is nearly all of them) countries living beyond their means is significant. The USA and many countries in Europe and Asia (South Korea and China are two exceptions) have raised taxes on the future (by default – spending more than you have necessarily increases taxes later) to consume today. The strong emerging markets are another exception, many having learned their lessons and stopped spending money they didn’t have in the 1990′s.
However the richest countries have been spending money they don’t have for decades and the increase in government debt as a portion of GDP is an increasingly serious problem. It would be nice if the government of the rich countries could behave responsibly but it does not look like many of them have citizens who will elect honest and competent leaders. As long as they elect leaders that insist on raising taxes on the future (and lying to the populace by claiming they cut taxes – because they eliminate taxes today) those countries will pay severely for the irresponsible spending.
Saying you cut taxes when you just delay them is equivalent to saying I paid off my credit card bill when all I did was get 2 new credit cards, borrow all the money I owed on my original card, pay that one off, and then borrow more to increase my debt even more. Yes it is true I did pay off my original credit card, but that is hardly the salient point. My credit card debt increase. All that has happened in the USA since the Clinton administration had a balanced budget is politicians used a credit card thinking to lower taxes while necessarily increasing them in the future. You don’t reduce debt by spending money you don’t have.
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According to a new report on Privately Held, Non-Resident Deposits in Secrecy Jurisdictions the United States is the country with the largest amount of private, non-resident, deposits. Cayman Islands takes second, upholding its commonly held reputation as a tax haven often used to avoid paying taxes own by wealthy people. Switzerland comes in 9th.
The countries with the most private, foreign deposits in billion of $US.
| Country | June 2008 | June 2009 | |
|---|---|---|---|
| 1 | United States | $2,899 | $2,183 |
| 2 | Cayman Islands | $1,515 | $1,550 |
| 3 | United Kingdom | $1,796 | $1,534 |
| 4 | Luxembourg | 588 | 435 |
| 5 | Germany | 494 | 426 |
| 6 | Jersey | 544 | 393 |
| 7 | Netherlands | 413 | 316 |
| 8 | Ireland | 273 | 276 |
| 9 | Switzerland | 289 | 274 |
| 10 | Hong Kong | 325 | 268 |
Since 2001 deposits in the Cayman Islands have more than tripled, while those in the UK have close to tripled and in the USA they have a bit more than doubled.
- Total Current total deposits by non-residents in offshore centers and secrecy jurisdictions are just under US$10 trillion;
- The United States, the United Kingdom, and the Cayman Islands top the list of jurisdictions, with the United States out in front with more than US$2 trillion in non-resident, privately held deposits in the most recent quarter for which data are available (June 2009);
- Contrary to expectations of perceived favorability for deposits, Asia accounts for only 6 percent of worldwide offshore deposits, although Hong Kong is the tenth most popular secrecy jurisdiction by deposits in this report;
- The rate of growth of offshore deposits in secrecy jurisdictions has expanded at an average of 9 percent per annum since the early 1990s, significantly outpacing the rise of world wealth in the last decade. The gap between these two growth rates may be attributed to increases in illicit financial flows from developing countries and tax evasion by residents of developed countries.
The report is an interesting read and provides some background on the banking practices often used in concert with wealthy people avoiding paying taxes. As you may we recall we noted that rich USA tax evaders tried to sue to hide their illegal activities from the Department of Justice. As far as I know those rich thieves have not been put in jail. I guess stealing tens and hundreds of thousands of dollars from the United States of America, by rich people, is not seen as important (either that or brides work to make sure the way rich people steal isn’t punished) say compared to some teenager stealing from a store.
Related: Government Debt Globally as Percentage of GDP 1990-2008 – USA, China and Japan Lead Manufacturing Output in 2008 – Oil Consumption by Country in 2007
10 Ways the New Healthcare Bill May Affect You by Katie Adams
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Starting this fall, your health insurance company will no longer be allowed to “drop” you (cancel your policy) if you get sick.
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Starting this year your child (or children) cannot be denied coverage simply because they have a pre-existing health condition. Health insurance companies will also be barred from denying adults applying for coverage if they have a pre-existing condition, but not until 2014.
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If you currently have pre-existing conditions that have prevented you from being able to qualify for health insurance for at least six months you will have coverage options before 2014. Starting this fall, you will be able to purchase insurance through a state-run “high-risk pool”, which will cap your personal out-of-pocket expenses for healthcare. You will not be required to pay more than $5,950 of your own money for medical expenses; families will not have to pay any more than $11,900.
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Under the new law starting in 2014, you will have to purchase health insurance or risk being fined.
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Starting in 2018, if your combined family income exceeds $250,000 you are going to be taking less money home each pay period. That’s because you will have more money deducted from your paycheck to go toward increased Medicare payroll taxes. In addition to higher payroll taxes you will also have to pay 3.8% tax on any unearned income, which is currently tax-exempt.
Related: How the health care bill could affect you – Answers About Health Care Bill – Why the Health Care Bill May Eventually Curb Medical Costs – post on health care – USA Consumers Paying Down Debt – Personal Finance Basics: Long-term Care Insurance