TIME: Will the Federal Reserve Cause a Civil War?

October 22, 2010 by admin  
Filed under Economic News, Featured Stories, US News, World News

Published on 10-20-2010

Source: Time

What is the most likely cause today of civil unrest? Immigration. Gay Marriage. Abortion. The Results of Election Day. The Mosque at Ground Zero. Nope.

Try the Federal Reserve. November 3rd is when the Federal Reserve’s next policy committee meeting ends, and if you thought this was just another boring money meeting you would be wrong. It could be the most important meeting in Fed history, maybe. The US central bank is expected to announce its next move to boost the faltering economic recovery. To say there has been considerable debate and anxiety among Fed watchers about what the central bank should do would be an understatement. Chairman Ben Bernanke has indicated in recent speeches that the central bank plans to try to drive down already low-interest rates by buying up long-term bonds. A number of people both inside the Fed and out believe this is the wrong move. But one website seems to believe that Ben’s plan might actually lead to armed conflict. Last week, the blog, Zerohedge wrote, paraphrasing a top economic forecaster David Rosenberg, that it believed the Fed’s plan is not only moronic, but “positions US society one step closer to civil war if not worse.” (See photos inside the world of Ben Bernanke)

I’m not sure what “if not worse,” is supposed to mean. But, with the Tea Party gaining followers, the idea of civil war over economic issues doesn’t seem that far-fetched these days. And Ron Paul definitely thinks the Fed should be ended. In TIME’s recently cover story on the militia movement many said these groups are powder kegs looking for a catalyst. So why not a Fed policy committee meeting. Still, I’m not convinced we are headed for Fedamageddon. That being said, the Fed’s early November meeting is an important one. Here’s why:

Usually, there is generally a consensus about what the Federal Reserve should do. When the economy is weak, the Fed cuts short-term interest rates to spur borrowing and economic activity. When the economy is strong and inflation is rising, it does the opposite. But nearly two years after the Fed cut short-term interest rates to basically zero, more and more economists are questioning whether the US central bank is making the right moves. The economy is still very weak and unemployment seems stubbornly stuck near 10%.

Read more: http://curiouscapitalist.blogs.time.com/2010/10/19/will-the-federal-reserves-next-meeting-lead-to-civil-war/#ixzz12wR8uNzn

Bloomberg: U.S. Is Bankrupt and We Don’t Even Know It

August 11, 2010 by admin  
Filed under Economic News, World News

Bloomberg Opinion

Aug. 11 (Bloomberg) — Laurence Kotlikoff, an economics professor at Boston University, talks about the state of the U.S. economy. Kotlikoff speaks with Erik Schatzker on Bloomberg Television’s InsideTrack.” (Source: Bloomberg)

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

To contact the writer of this column: Laurence Kotlikoff at kotlikoff@bu.edu

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US sees UN as key after Bush era difficulties

August 13, 2009 by admin  
Filed under Featured Stories, World News

Aug. 13, 2009
Associated Press , THE JERUSALEM POST

In a not-so-subtle dig at the Bush administration, US Ambassador Susan Rice said Wednesday the United States has paid the price for “stiff-arming the UN” and spurning international partners and is now embarked on a new era of global engagement.

A key to this new engagement is a dramatic new approach to the United Nations, she said.

Setting the stage for US President Barack Obama’s first address to the UN General Assembly in September, Rice called the 192-nation organization “vital to our efforts to craft a better, safer world” because “so many of America’s security interests come together today at the United Nations.”

She never mentioned the Bush administration and its difficult and sometimes antagonistic relationship with the UN, especially when John Bolton was ambassador. But her speech at New York University’s Center for Global Affairs, released by the US Mission, highlighted the differences in tone and actions under Obama.

Rice said the change in US approach to the UN is essential because of the “extraordinary array” of global security challenges in the 21st century.

She cited poorly guarded nuclear weapons and material, the global financial meltdown, wars in Iraq and Afghanistan, a build-up of nuclear weapons capabilities by North Korea and Iran, terrorist acts by al-Qaida and its affiliates, genocide, cyber attacks, international crime and drug trafficking, pandemics, and global warming.

These challenges cannot be tackled alone, Rice said, and the Obama administration believes that while US leadership is necessary, the “effective cooperation” of a broad range of friends and partners is essential.

She cautioned that the US has “no illusions” about the UN’s shortcomings, singling out the Security Council stumbling over issues such as Darfur, Zimbabwe and Myanmar, the General Assembly unfairly focusing on Israel, and the UN system needing to “confront waste and abuse even as it struggles to meet daunting new responsibilities for peacekeeping, humanitarian assistance and development.”

Reiterating Obama’s statement that the UN is imperfect but indispensable, Rice stressed that “there can be no substitute for the legitimacy the UN can impart or its potential to mobilize the widest possible coalitions.”

She said there is also no better alternative to sharing the burdens and costs of UN peacekeeping and humanitarian operations – and “there is no doubt that we are more secure when the UN can foster nonproliferation and promote disarmament.”

“In short, the UN is essential to our efforts to galvanize concerted actions that make Americans safer and more secure,” Rice said.

Since she arrived at the UN, Rice said the US negotiated a resolution with tough new sanctions against North Korea for conducting a second nuclear test.

It has also joined the Human Rights Council, embraced UN anti-poverty goals “which the United States previously shunned,” rescinded a ban on US assistance to programs that support family planning and reproductive health services, resumed US funding for the UN Population Fund and signed the UN Convention on the Rights of Persons with Disabilities, she said.

The United States also reversed course and backed a General Assembly statement opposing violence and discrimination based on sexual orientation, and it no longer opposes mentions of the International Criminal Court or “the right to food,” Rice said, “and we are forging a new path on climate change commensurate with our responsibilities.”

She said in addition to the vast array of challenges the US inherited, there will be new ones, and inevitably there will be setbacks, frustrations and differences that remain intractable.

“But we’ve seen the costs of disengaging,” she said. “We have paid the price of stiff-arming the UN and spurning our international partners.”

“The United States will lead in the 21st century – not with hubris, not by hectoring, but through patient diplomacy and steadfast resolve to strengthen our common security by investing in our common humanity.