The Bankrupt United States of America

Oh,it's happening, now! Unemployment at 10% or above. Money so tight that no one is expanding their business with new taxes on them on the horizon. Unfettered spending by the Imperial Federal Government. A Socialist Democrat in office with a semi-socialist congress. Oh it's happening. It just jumped the tracks and is careening over the cliff as I write this.

"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery."

-Charles Dickens
David Copperfield

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Warren Buffett: We need to curtail our out-of-control spending, or we'll destroy the value of the dollar and many Americans' life savings.

Some not-so-fun facts from Buffett's editorial today ( 19 August, 2009 ) in the New York Times:

•Congress is now spending 185% of what it takes in
•Our deficit is a post WWII record of 13% of GDP
•Our debt is growing by 1% a month
•We are borrowing $1.8 trillion a year
$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year and Americans save a remarkable $500 billion and lend it to the government, we'll still need another $900 billion.

So, where's it going to come from? Most likely the printing press. And, ultimately, Buffett says, that will destroy the value of the dollar.

Click to expand...

© 2008 Warren E. Buffett
An excerpt from the 2007 Annual Report of Berkshire Hathaway Corporation

"Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed. Promises involving very early retirement – sometimes to those in their low 40s – and generous cost-of-living adjustments are easy for these officials to make. In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep."
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The (awful) facts:
U.S. states have accumulated an estimated $2.73 trillion present value of pension and benefit obligations to retirees, according to a December report from the Pew Center on the States. State pension and benefit funds are short almost 27 percent, or $731 billion, of that amount. The Government Accountability Office said last week that 58 percent of 65 large state and local pension plans were adequately funded in 2006, down from 90 percent in 2000.

Such studies may overstate the health of pensions because they are allowed to include expected returns in determining their funding gap, said Mark Ruloff, director of asset allocation at Arlington, Virginia-based consultant Watson Wyatt Worldwide Inc.

trysail said:

"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery."

-Charles Dickens
David Copperfield

Click to expand...

For an individual, perhaps. But not for a government, and not for a family, and not for a business.

Everyone who has a mortgage or home equity loan is technically living beyond their means. Governments just sell treasuries instead of taking out home equity loans. Buy now and pay now isn't what made America the most prosperous nation ever. Capitalism only works on interest payments.

bflagsst said:

Everyone who has a mortgage or home equity loan is technically living beyond their means. Governments just sell treasuries instead of taking out home equity loans. Buy now and pay now isn't what made America the most prosperous nation ever. Capitalism only works on interest payments.

Click to expand...

Nobody is saying you can't borrow. There's a difference between prudence and recklessness. As we've seen ( and continue to see ), "taking out home equity loans" requires good judgment and those who exceeded their borrowing capacity rue the day they assumed housing prices only went in one direction.

http://www.bloomberg.com/apps/news?pid=20601103&sid=a5N852fTN2SE

Pension Gap of $1 Trillion [ or is it $3 Trillion ] Is ‘Daunting’ Bill to U.S. States
By Darrell Preston and Nanette Byrnes

Feb. 18 (Bloomberg) -- U.S. states must contend with a more than $1 trillion gap between what they have saved and what they have promised to retired workers for pension and health-care benefits, the Pew Center on the States said in a report today.

States have saved $2.35 trillion of the $3.35 trillion owed to workers as of mid-2008, the center said. The Washington-based group expects the deficit to grow because of investment losses states sustained in the second half of 2008, the report said.

Illinois,Connecticut and New Jersey were among the 16 lowest-ranked in terms of funding pension and retiree health care, according to Pew. The gap reflects “states’ own policy choices and lack of discipline” in failing to set aside enough money and expanding benefits without deciding how to pay for it, the report said.

“States don’t manage this liability and the costs continue to go up,” said Susan Urahn, managing director for the Pew Center, in a conference call with reporters yesterday. “States will either have to make cuts in other priorities or raise taxes.”

Local governments’ borrowing costs in the U.S. municipal bond market may rise because companies that grade the debt factor in the liability, said Urahn. Investors seek higher yields when ratings are lower to compensate for the perception of greater risk.

$3 Trillion
The gap that Pew calculated may be one-third that estimated by Orin S. Kramer, chairman of New Jersey’s State Investment Council and manager of Boston Provident Partners, a hedge fund. Kramer projected a $2 trillion unfunded liability for public pension funds and a $1 trillion gap for health-care benefits for retired public employees, according to a January commentary published by Bloomberg.

Underfunding of pensions has been cited in rating cuts or negative outlooks for Connecticut, Nevada and New Jersey, said Edith Behr, a senior credit officer with Moody’s Investors Service.

“States have less money to pay for services that are absolutely expected,” Behr said in an interview. “It’s when you get to times like this when you start having to make some of the tough choices, cutting back services, cutting back staff, raising taxes.”

Urahn called the pension gap “perhaps the most daunting” of all the bills that will come due for states and municipalities. The full payment for plans the study looked at was $108 billion last year, compared with spending of $152 billion on higher education. Florida, Idaho, New York and North Carolina entered the recession with fully funded pensions, the report said. Twenty states have saved nothing for future obligations for health care and other benefits.

California’s Obligations
California, the most-populous U.S. state, owes $51.8 billion for future retiree health and dental costs, an increase of $3.6 billion from a year earlier, said state controller John Chiang in a press release Feb. 9. At the same time the state faces a budget deficit of $20 billion over the next 18 months.

The state can’t ignore its promised benefits “even as we try to claw our way out of the recession and provide needed cash to the state’s coffers,” Chiang said in a statement.

Fitch Ratings, which hasn’t seen states cutting back on funding pensions, is monitoring for such steps because of the tendency by states to trim contributions in past recessions, Richard Raphael, an analyst with Fitch, said in an interview.

Illinois sold bonds last month to cover its pension liability.

http://www.npr.org/templates/transcript/transcript.php?storyId=123824917

February 18, 2010 - LINDA WERTHEIMER, host:

These are tough times for state governments. Many of them are contending with huge budget deficits. And a report issued today says there's a daunting challenge just ahead. Many states have promised big pension and retirement benefits to their employees without putting aside money to pay for them. NPR's Jim Zarroli reports.

JIM ZARROLI: The report was put out by the Pew Center on the States, and it portrays a state pension system that's headed for crisis, if it's not already there. Susan Urahn is the center's managing director.

Ms. SUSAN URAHN (Managing Director, Pew Center): The 50 states have racked up more than $3.3 trillion in long-term liabilities for pensions, health care and other retirement benefits that they promised to their current employees and retirees. But they have not got any money to set aside to pay a trillion dollars, which is almost a third of this bill.

ZARROLI: Urahn says states often try to compensate for relatively low salaries by offering their employees generous retirement benefits. And they can be very generous. Connecticut has a series of early retirement programs that allow employees with 10 years of service to retire at age 52. Politicians can get away this because the bill won't come due till after they've left office. Orin Kramer heads the New Jersey Investment Council.

Mr. ORIN KRAMER (New Jersey Investment Council): It's an easy omission, because if you underfund, you're passing costs on to future generations of taxpayers, but that isn't going to be obvious for a long time.

ZARROLI: The report says almost all state pension plans are underfunded. Two states - Illinois and Kansas - have set aside less than 60 percent of the money they'll need to pay benefits. Six others are underfunded by a third or more.

The Pew Center's Susan Urahn says the problem has been exacerbated by the recession, which has cut into the value of state investment funds. But Urahn says states have underfunded their plans even in good times.

Ms. URAHN: This matters tremendously because how well states manage their retirement costs affects how much money they have to spend on other priorities. And, in fact, these costs are already adding significant pressure to already stressed state budgets.

ZARROLI: Urahn says states that underfund their pension plans have to make up for it later. She compares what happened to two neighboring states: New York and New Jersey.

Until 2002, both kept their pension plans adequately funded. But then New Jersey stopped making regular payments - much like someone who keeps using a credit card while paying only the minimum each month, New Jersey has now seen its liabilities soar.

Ms. URAHN: Fast forward up to 2008. Now New Jersey's annual bill is a billion dollars more than New York's, even though its total pension liability is $15 billion less. So that's the impact of simply kicking the can down the road.

ZARROLI: And she says many states may be in worse shape than they appear because they use an accounting technique called smoothing. They average out the value of their investments over five years or so, which tends to obscure the depth of their losses in times when the financial markets have taken a hit, like they have in recent years.

But the report also says it's not too late for states to get their houses in order. Simple changes made now, like raising the retirement age by just a year, can make a big difference over time. But that will require some tough choices by state officials, and that's something many of them have shied away from.

Jim Zarroli, NPR News, New York.

WERTHEIMER: To see whether your state has high or low funding levels for its pension plans, go to npr.org.

New Jersey Pension Deficit Grows to $46 Billion
By Dunstan McNichol

Feb. 25 (Bloomberg) -- The funding deficit in New Jersey’s pension system climbed by more than a third to $46 billion last year because of investment declines and a failure to make full contributions, annual financial reports released today show.

The value of the pension fund assets fell to $66 billion as of June 2009, from $83 billion a year earlier, the state treasury department reported. At the same time, the estimated value of the benefits New Jersey has promised to working and retired teachers and government workers grew to $135 billion from $126 billion.

New Jersey would have to pay $3 billion into the system, or more than 10 percent of its current budget, during the fiscal year that starts July 1 to adequately finance the benefit costs, the reports say. The state has put nothing into the pension systems for two years, and contributed a total of $2.3 billion since 2004, financial information included in recent state bond documents shows.

“This is insanity,” said Ned Thomson, a Wall Township councilman who serves on the Public Employee Retirement System board of trustees, which received their report at a special meeting in Trenton today. “It’s ridiculous. A kindergartener could figure this one out; you don’t pay, you go broke.”

U.S. states in total set aside $1 trillion less than the amount promised in retirement benefits, the Pew Center on the States said this month in a report that was based on pension funds as of June 30, 2008. Since then, the funds lost a total of at least $600 billion, according to an October 2009 report by the U.S. Census Bureau on the 100 largest public pension funds...

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Investments, Contributions
The fund gaps are the result of investment losses as well as decisions by governors and lawmakers to reduce or eliminate pension contributions in the face of budget deficits brought on by declining tax revenues. States have faced a total of $350 billion in revenue shortages since July 2009, according to the Washington, D.C.-based Center on Budget and Policy Priorities.

New Jersey and Illinois are among the 16 lowest-ranked states in terms of funding pension and retiree health care, according to Pew. Illinois has the largest deficit at $55 billion as of 2008, according to data compiled by Bloomberg. New Jersey’s gap was $34 billion as of June 2008.

The state’s $46 billion unfunded pension liability is an actuarial calculation that assumes the state will make its full contribution next fiscal year and only accounts for a portion of past investment losses.

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Funded Ratio
The difference between the $66 billion value of the pension fund and the $135 billion estimate of promised benefits is $69 billion. That means the value of New Jersey’s pension funds is less than half the amount needed to pay the benefits promised.

New Jersey’s ratio of assets against liabilities, or funded ratio, fell to 66 percent last year from 73 percent at June 30, 2008, the report shows. The ratio measures the cost of benefits against a formula that uses assumptions about inflation and investment returns to determine the value of the pension funds.

Former Governor Jon Corzine, a one-term Democrat who was ousted in the November election by Republican Chris Christie, enacted legislation that allowed New Jersey’s 566 local governments to skip half the $1.3 billion in payments they owed the pension system last year, and repay them over 15 years with interest. The municipalities will have to pay $1.6 billion in April 2011, according to the report.

Pension Changes
New Jersey’s Democratic-controlled Senate last week passed a package of bills aimed at closing the pension hole by excluding part-time workers from the system, reducing benefits and forcing teachers to pay more for health care. Christie has said he supports such measures, which still need approval from the Assembly.

Because the changes primarily affect employees who are decades away from retirement, the reforms will have little impact on the system’s underfunding, Janet Cranna, an actuary from Buck Consultants of Secaucus, New Jersey, who presented today’s reports, told board members. She said the best solution would be for the state to begin making payments.

“The pension plans don’t come without costs,” she said.

Trustees of the funds voted to send letters asking lawmakers to hold off on considering the pension changes until they receive a report on their financial impact from the actuary.

New Jersey’s pension systems pay out about $6.1 billion in benefits each year, according to the Division of Pension and Benefits’ most recent annual report.

The funds have gained 13 percent since June 30, the latest monthly report by the state Division of Investment shows. As of Jan. 31, the funds had a value of $67 billion, according to the report.

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Bowles Says Deficits Will Make U.S. ‘Second-Rate’
By David Mildenberg

March 9 (Bloomberg) -- Erskine Bowles, co-chairman of the commission on U.S. deficit reduction, said entitlement programs such as Social Security will turn the nation into a “second- rate power” if their costs aren’t reduced.

“We’re going to mess with Medicare, Medicaid and Social Security because if you take those off the table, you can’t get there,” Bowles said today in a speech to North Carolina bankers. “If we don’t make those choices, America is going to be a second-rate power and I don’t mean in 50 years. I mean in my lifetime.”

President Barack Obama created the commission last month, and named Bowles, 64, former Clinton White House chief of staff, and former Wyoming Republican Senator Alan Simpson, 78, to lead the panel. The commission’s recommendations to bring the budget deficit down to 3 percent of the economy by 2015 are due Dec. 1.

“All of our revenue is completely consumed by entitlements,” Bowles said. “This is today, not some forecast into the future. Every dollar we spend on the military, homeland security, transportation, education and research is borrowed,” and half of that comes from foreign sources, he said. “That is a recipe for disaster.”

The Obama administration has been prodding banks to lend more to small companies to stimulate the economy and provide jobs.

Public debt “is going to crowd small business out of the marketplace and they aren’t going to have capital to grow and create jobs,” Bowles said. To people who say the U.S. must invest more in education, research and transportation, “there’s not going to be any money for that or anything else unless we get the spending under control,” he said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayzGJ.v.73wA&pos=8

Trysail...I was just wondering if there are any statistics on the cost of providing a dollar of SSI. The same for Medicaid and Medicare.

U.S., U.K. Move Closer to Losing Rating, Moody’s Says
By Matthew Brown

March 15 (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report...

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Full article:
http://www.bloomberg.com/apps/news?pid=20601082&sid=a8c_1vtVGzD8

Time to Pay the IOUs out of the ‘Lock Box’
by Greg Knapp

All the lies about the Social Security “lock box” are now on full display. This is the year we will start paying out more from the SS program than we took in. We’ve gotten here even earlier than predicted. This wasn’t supposed to happen until 2017. Whoops…

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds— which are kept in a nondescript office building just down the street from Parkersburg’s municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn’t be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

But, wait! We have $2.5 trillion in there and it’s earning interest. It’s real money. We’re fine, right? Right. Pull this leg and it plays “Jingle Bells.” This is the mess conservatives have warned about for so long. The lock box hoax is nothing but a promise from the government (us) to pay us. Yes, the bonds will be paid, but that shouldn’t ease your anxiety. The money has to come from somewhere. Government only has two choices to get it:

1) Taxes.

2) Borrowing.

That's it.
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National Debt Up $2 Trillion on Obama's Watch

The latest posting from the Treasury Department shows the National Debt has increased over $2 trillion since President Obama took office.

The debt now stands at $12.6 trillion. On the day Mr. Obama took office it was $10.6 trillion.

President George W. Bush still holds the record for the most debt run up on his watch: $4.9 trillion. But it took him over four years to rack up the first two trillion dollars in debt. It has taken Mr. Obama 421 days.

But the Obama Administration routinely blames the Bush Administration for inheriting a budget surplus and turning it into years of record-breaking deficits and debt -- and then leaving it on the doorstep of the new president.

http://www.npr.org/templates/story/story.php?storyId=124894618

Pension Woes May Deepen Financial Crisis For States
by Tamara Keith
March 21, 2010
Weekend Edition Sunday

Over the past several decades, many states and local governments made pension promises that will be expensive to keep. Now, they're struggling to fund their obligations.



There's a looming U.S. financial problem that's big, is getting larger and could threaten the solvency of some states. From Connecticut to California, pension funds for teachers, firefighters and other public employees are severely underfunded.

"Generally, they're in an abominable state," says Joshua Rauh, an associate professor of finance at the Kellogg School of Management at Northwestern University.

A recent report from the Pew Center on the States put the tab for unfunded pension liabilities at $452 billion. But Rauh and others say pension funds are using unrealistic assumptions about investment returns, meaning the pension funding hole is likely much deeper.

"Our calculation is that it's more like $3 trillion underfunded," Rauh says.

And the kicker is taxpayers are on the hook.

What We're Looking At
All this week, NPR will be looking at the nation's looming pension crisis.


•Risking Retirement Funds: Jim Zarroli reports a lot of cities and states are trying to rebuild pension funds by resorting to chancy investments.


•Pennsylvania's Pension Spike: Tamara Keith reports from Pennsylvania, where the two large public pension funds are in multi-billion dollar holes.


•Illinois Gets a Failing Grade: David Schaper unpacks the messy pension politics that have led to Illinois being the most underfunded pension system in the country.


•Two States, Different Outcomes: Frank Morris of member station KCUR reports from Kansas and Nebraska, both known for fiscal conservatism, but with wildly different pension standings.


•California Pensions: Richard Gonzales reports that California is paying six-figures for many retired state employees.


•Cranston, R.I.: Jim Zarroli reports from a small city that's dialing back ambitions due to a huge pension bill.


Stuck With The Bill
"People say, 'Well that's ridiculous. We're just not going to pay it. Let [the pension funds] go broke,'" says Robert Gentzel, policy director for the Pennsylvania State Employees' Retirement System. "That's not what would happen. The taxpayers are ultimately going to have to pay the bill."

That's because public employee pension funds are backed by the full faith and credit of the government. Over the past several decades, many states and local governments made pension promises that will be expensive to keep. Now, they're struggling to fund their obligations.

Take Cranston, R.I.
"Right now, the unfunded liability is $240 million," Cranston Mayor Allan Fung told NPR's Jim Zarroli. That's more than double the city's annual budget.

Fung added, "It's a big obligation, and it's basically a ticking time bomb for the city of Cranston that we are trying to get a handle on."

Underfunding Becomes Next Generation's Problem
The Pew report found state pension obligations nationwide were 84 percent funded. That doesn't sound so bad, but that figure does not include the full impact of the 2008-2009 market collapse, which hit pension funds hard.

Disappointing returns isn't the only funding challenge pension funds face. Many local and state governments haven't been putting enough money into the funds. When budgets are tight, shorting pension funds is a lot more politically palatable than raising taxes or having to make painful cuts.

"Underfunding is very easy because all you're doing is making this the next generation's problem," says Rick Dreyfuss of the free market-oriented Commonwealth Foundation in Harrisburg, Pa. "The next generation doesn't understand the magnitude of this, and they're too young to vote so there's not a lot of political opposition to that."

Dreyfuss says there's a high political rate of return for increasing benefits, and there's basically no political upside to actually paying for those benefits.

trysail said:

U.S., U.K. Move Closer to Losing Rating, Moody’s Says

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Full article:
http://www.bloomberg.com/apps/news?pid=20601082&sid=a8c_1vtVGzD8

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Wow, what would the financial industry do without Moody's and S&P? They've been so on the ball with their ratings it's frightening. Moody's threatens to cut the Asia-Pacific sovereign ratings every year. Moody's will have to cut the ratings of every nation on the planet if the US credit rating dips.

http://www.npr.org/templates/story/story.php?storyId=124909092

Gambling To Fix Pensions Can Lead To A Bigger Bind
by Jim Zarroli
March 21, 2010
All Things Considered

When the owners of Stuyvesant Town and Peter Cooper Village in Manhattan decided to abandon the properties to their creditors in January, residents were left in a kind of legal limbo, worrying about what would happen to the place they called home.

They weren't the only ones who felt the blow.

As it turned out, the $5.4 billion purchase of the two complexes had been funded in part by outside investors, including Florida's public pension fund and the California Public Employee Retirement System (or CalPERS), which is said to have invested about $500 million in the deal.

"Hindsight tells us clearly that that was gravely in error, and frankly the people who were responsible for that decision aren't at CalPERS anymore," says Joe Dear, CalPERS' chief investment officer. And Stuyvesant Town was only one of several bad investments for CalPERS, which saw its real estate portfolio lose half its value during the recent mortgage meltdown.

A Change Of Strategy
With $200 billion in assets, CalPERS can absorb the loss, but the collapse of the Stuyvesant Town deal says boatloads about how much public pension fund investing has changed over the past few decades. Once, public pension funds put their money into the safest of investments, like Treasury bills. But in the 1980s, many began shifting into stocks, which tended to have better returns over time.

When the dot-com bubble burst, many funds took a big hit, says Keith Brainard, research director of the National Association of State Retirement Administrators.

"A lot of these funds came out of the 2002 market decline believing they needed to further diversify their holdings," he says.

Today, pension funds like CalPERS put their money in a wide range of assets, like foreign and domestic stocks, corporate bonds, real estate, commodity futures, private equity funds and hedge funds. By putting their money into lots of different assets, pension funds lower the risk that they will be adversely affected by the ups and downs of the market, Dear says.

"The most certain, time-tested risk management tool in pension investing is diversification. That means diversification among types of assets, among geographies and among managers' styles," he says.

By investing more broadly, pension funds can reap big rewards in the long run, and many now project average annual returns of 8 percent or more over time. But they can fall well short of those goals in down times — like the recent recession.

When Desperation Leads To Growing Risk
Meanwhile, there's a danger that some funds will go too far.

Many state and city governments have failed to fund their pension systems adequately over the years, leaving them far short of the money they'll need to pay retirement benefits they've promised their employees. The problem has grown worse during the recent recession, which has left governments scrambling for ways to meet their obligations.

As a result, many pension funds are falling under greater pressure to take risks as a way of compensating for the pension shortfall, says Joshua Rauh, associate professor of finance at Northwestern University's Kellogg School of Management.

North Carolina's General Assembly recently approved a law allowing its pension fund, long known for conservative management, to invest 5 percent of its assets in riskier assets, like junk bonds. Pension funds in states like Florida have racked up losses from collateralized debt obligations tied to subprime mortgages.

"Many funds are investing in strategies that people might classify as risky," Rauh says. "They're investing money in private equity and other investment vehicles that may have a higher expected return on average, but also more risk."

He adds, "One of the reasons they are trying to do this is they are trying to gamble their way out of the problem."

Most pension funds still have plenty of money to keep writing checks for retirees for the foreseeable future. But as the collapse of the Stuyvesant Town deal makes clear, funds are also growing comfortable with a level of risk that might have been unthinkable a few decades ago.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYUeBnitz7nU&pos=2

Obama Paying More Than Buffett as Bonds Show U.S. Losing AAA
By Daniel Kruger and Bryan Keogh

March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

Moody’s Warning
While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.

“Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to make the required adjustment to stabilize markets without choking off growth.”

Obama’s unprecedented spending and the Federal Reserve’s emergency measures to fix the financial system are boosting the economy and cutting the risk of corporate failures. Standard & Poor’s said the default rate will drop to 5 percent by year-end from 10.4 percent in February.

Relative Returns
Bonds sold by companies have returned 3.24 percent this year, including reinvested interest, compared with a 1.55 percent gain for Treasuries, Bank of America Merrill Lynch index data show. Returns exceeded government debt by a record 23 percentage points in 2009.

Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody’s and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt.

P&G, the world’s largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody’s and AA- by S&P, makes everything from Tide detergent to Swiffer dusters.

Corporate ‘Scarcity’
New Brunswick, New Jersey-based Johnson & Johnson’s 5.15 percent securities due August 2012 yielded 1.11 percent on Feb. 17, 3 basis points less than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s largest health products company is rated AAA by S&P and Moody’s.

Yields on bonds of home-improvement retailer Lowe’s in Mooresville, North Carolina, drugmaker Abbott Laboratories of Abbott Park, Illinois, and Toronto-based Royal Bank of Canada have also been below Treasuries, Trace data show.

“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality credit,” particularly in shorter-maturity debt, said Malvey, whose Lehman team was ranked No. 1 in fixed-income strategy by Institutional Investor magazine from 1998 through 2007.

Losing Momentum
Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey said the last time he can recall that a corporate bond yield traded below Treasuries was when he was head of company debt research at Kidder Peabody & Co. in the mid-1980s.

While Treasuries are poised to make money for investors this quarter, they are losing momentum. The securities are down 0.43 percent in March after gaining 0.4 percent last month and 1.58 percent in January, Bank of America Merrill Lynch indexes show.

Benchmark 10-year Treasury yields will reach 4.20 percent by year-end, up from 3.69 percent last week, according to the median forecast of 48 economists in a Bloomberg News survey. Two-year yields will rise to 1.77 percent, from 0.99 percent.

Relative Yields
Investors demand about half a percentage point more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2 percent of its economy, yielded about half a percentage point more than Treasuries.

President Obama’s budget proposal would create bigger deficits every year of the next decade, with the gaps totaling $1.2 trillion more than his administration projects, the nonpartisan Congressional Budget Office said this month. Publicly held debt will zoom to $20.3 trillion, or 90 percent of gross domestic product, by 2020, the CBO forecast.

There’s “a lack of a long-term plan to deal with the federal budget deficit,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “At some point in time the market may lose its patience.”

Balance Sheets
Deutsche Bank and Barclays Plc, two of the 18 primary dealers of U.S. government securities that are obligated to bid at the Treasury’s auctions, say balance sheets of high-rated companies make them more attractive than Treasuries.

Corporate borrowers are reducing debt at a record pace. Companies in the S&P 500 cut their liabilities by $282 billion to $7.1 trillion in the fourth quarter from the prior three months, Bloomberg data show. That represents 28 percent of assets, the least in at least a decade.

Investors are accepting smaller premiums to lend to companies, with yields on bonds rated at least AA falling to within 107 basis points of Treasuries on average, Bank of America Merrill Lynch indexes show. That’s down from the peak of 515 basis points in November 2008, and approaching the record low of 36 in 1997.

Adding to Corporates
New York Life Investment Management is adding to bets the difference in yields will continue to shrink.

“As the balance sheet of corporate America continues to improve and the balance sheet of the government deteriorates, that spread should narrow,” said Thomas Girard, a senior money manager who helps invest $115 billion at the New York-based insurer. “There is some sort of breaking point. The federal government can’t keep expanding its borrowing without having to incur some costs.”

For all the concern about U.S. finances, Treasuries are unlikely to lose their role as the world’s borrowing benchmark, said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. The U.S. has the biggest, most liquid securities markets, said Cheah.

Surpluses to Deficits
Speculating that Treasuries may lose their privileged position is “not a bet I want to put on,” said Cheah, who worked at Singapore’s central bank. Yields on 10-year notes are about half their average since 1980.

The last time there was talk of the U.S. losing its status as the world’s benchmark for bonds was in the late 1990s, when the government began amassing budget surpluses in 1998 for the first time in almost three decades. The amount of Treasuries outstanding dropped 8 percent to $3.4 trillion in 2000, the biggest annual decline since 1946.

Treasury supply resumed growing in 2001 after two rounds of tax cuts proposed by President George W. Bush led to deficits. Outstanding Treasury supply rose 53 percent to $4.5 trillion in 2007 from 2000 as the U.S. borrowed to finance tax cuts intended to revive a slumping economy. The amount has since risen 64 percent to $7.4 trillion.

Relative Supply
More is on the way. The U.S. will sell a record $2.43 trillion of debt in 2010, according to the average forecast of 10 of the 18 primary dealers in a Bloomberg survey.

At the same time Treasury sales are rising, the cash position of the largest corporations is swelling. Companies in the S&P 500 held a record $2.3 trillion as of the fourth quarter, Bloomberg data show.

High-rated corporate bonds due in three to five years are most likely to yield less than Treasuries, according to Deutsche Bank’s Pollack. The growing supply of Treasuries with those maturities will make government debt a bigger proportion of indexes that fund managers measure their performance against, he said. Managers betting Treasury yields will rise may diversify into corporate debt, Pollack said.

“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford. “It wouldn’t be the first time that I would scratch my head and say ‘this doesn’t make sense, the market’s behaving irrationally.’ And it can go on for much longer than you may think.”

http://www.npr.org/templates/story/story.php?storyId=124825100

Pennsylvania Pensions: From Surplus To A Deep Hole
by Tamara Keith
March 22, 2010
Morning Edition


There's a ticking debt bomb, and taxpayers are on the hook. From California to New Jersey, public employee pension systems are underfunded.

In Pennsylvania, generous benefits, underfunding from the state and worse-than-expected investment returns have pushed the state's two large public pension funds into multibillion-dollar holes.

Like many other states, Pennsylvania hasn't done a very good job of setting aside enough money to make good on the pension promises it made.

Soon, school districts around the state will have to dramatically increase their pension contributions. For the Derry Township School District in Hershey, Pa., the bill will jump from about $600,000 this year to $3.7 million in 2013.

"It's very significant," says Superintendent Linda Brewer.

Brewer faces some stark choices: cut programs and increase class sizes, or raise property taxes.

"Our retired citizens are saying, 'Do not raise our taxes,' " Brewer says. "And our parents are saying, 'We don't want you to raise our taxes, but if that's what it takes to maintain these solid programs, that's what we want you to do.'"

There's another option: Gov. Ed Rendell and others want to soften the impact of the looming crisis with an accounting maneuver. They want to spread the pain of making the pension funds whole over a longer time frame. But critics say that will just kick the can down the road.

Passing The Bill To Future Generations
The fourth-graders playing in the gym at Hershey Intermediate Elementary School don't know it, but they could ultimately have a higher tax burden to pay their teachers' pensions.

"They're going to be paying for this down the road, when they're grown and they have jobs," Brewer says.

But as Brewer sees it, these pensions are how school districts attract highly qualified teachers. Jerry Oleksiak became a public schoolteacher 25 years ago, partly for the pension benefits.

"I knew I was not going to make the money that I could make elsewhere," Oleksiak says. "I was willing to do that because, first of all, I loved teaching, and secondly, I knew that there was something worthwhile at the end of that."

Unfunded Liabilities Mount
Combine the pension obligations for state employees and teachers, and Pennsylvania currently has more than $20 billion in unfunded liabilities. That amount is expected to balloon in the next few years to more than $55 billion.

By The Numbers
A closer look at the Public School Employees' Retirement System of Pennsylvania.

2000: $9.5 billion surplus (funded ratio: 123.8 percent)
2009: $15.7 billion unfunded liability (funded ratio: 79.2 percent)
2013: $40.1 billion projected unfunded liability (funded ratio: 54.2 percent)

But just 10 years ago, these pension funds were running surpluses.

"Some of the worst things are done in the best of times," says Steven Nickol, who now works for the state teachers union. In 2001, he was a member of the Pennsylvania House of Representatives.

Back then, he says, the pension funds were flush with cash, and those surpluses were burning a hole in the state's pocket.

"There was, like, euphoria, and legislators in Pennsylvania and other states basically dipped into their surpluses and increased benefits for employees," he says.

Nickol, a fiscally conservative Republican, was one of the very few lawmakers to vote against the expanded benefits.

Before the ink was dry, it became clear that the surpluses weren't going to last. But instead of putting more state money into the pension system, the legislature opted to defer the suffering for 10 years.

Robert Gentzel, policy director for the Pennsylvania State Employees' Retirement System, says the legislature's decision didn't make the state's unfunded pension liabilities go away — it only made them worse.

"The commonwealth has basically been saying to us, 'Keep paying that money. Pay this increased benefit,' " Gentzel says. "And we say to them, 'It's going to cost you a lot of money.' And they say, 'Just put it on our tab.'"

And he says the tab keeps getting bigger and bigger.

The market crash in 2008 dashed hopes that stellar investment returns could solve the state's pension problems. Both of the state's big pension funds lost more than 25 percent in a single year.

The Impact Of Politics
Rick Dreyfuss, a senior fellow with the free market Commonwealth Foundation in Harrisburg, says Pennsylvania's pension predicament, like in so many others states, is the result of politics.

"Pension plans are run for a political rate of return," Dreyfuss says. "That is to say that it's easy for a politician or a policymaker to give benefits right now, even retroactively, and then defer that cost up to 30 years."

There's really no political upside to raising taxes or cutting programs to make pension funds whole. In Pennsylvania, as in all states with public pension funds, obligations to retirees are iron clad. And eventually, state residents will have to pay.

The US is fat, broke and stupid.

This is not news.

California Pensions Are $500 Billion Short, Stanford Study Says
By Christopher Palmeri

April 5 (Bloomberg) -- California’s three biggest pension funds are as much as $500 billion short of meeting future retiree benefits, a Stanford University report said.

The California Public Employees’ Retirement System, the largest U.S. public pension fund; the California State Teachers’ Retirement System, the second-biggest, and the University of California Retirement System are understating their future liabilities by using projected rates of return that don’t properly account for investment risk, the Stanford Institute for Economic Policy said today.

The report, from five Stanford graduate students and their faculty adviser, said the funds estimate average annual returns of 7.5 percent to 8 percent. The funds ought to use a more conservative calculation of 4.14 percent, the report said.

“You should not use an 8 percent rate when the liabilities are set in stone,” said Joe Nation, the faculty adviser in a telephone interview.

“Using that historical rate ignores the fan of outcomes,” said Howard Bornstein, one of the report’s authors, in a telephone interview

Calpers, as the largest fund is known, disagreed with the methodology of the study.

‘Funny Math’
“This study is an exercise in applying a new funny math to pension financing,” said Pat Macht, a spokeswoman for the fund in an e-mail today. “It ignores the reality of the last 20 years -- that even in spite of several market downturns, Calpers continued through a well-balanced, diversified portfolio to return 7.9 percent in investment earnings over the last 20 years.”

The report recommended that the state decrease benefits to retirees, increase future contributions from plan members and invest in less risky assets.

“This study reinforces the immediate need to address our staggering pension debt,” California Governor Arnold Schwarzenegger said in press release. “According to the study, California taxpayers are on the hook for over a half trillion dollars. That’s nearly six times the size of our entire state budget.”

The governor last year recommended creating a lower level of benefits for new hires, said Andrea McCarthy, a spokeswoman for the governor.


http://www.bloomberg.com/apps/news?pid=20601110&sid=aL0e5WpaHgzQ

Who cares what you think about this? This has what to do with writing erotica?

http://www.bloomberg.com/apps/news?pid=20601110&sid=aapHsedDu.vQ


BRIC Leaders to Discuss Currencies for Trade at Brasilia Summit
By Lyubov Pronina

April 9 (Bloomberg) -- The leaders of Brazil, Russia, India and China will discuss broadening the array of world currencies used in international trade at their summit next week as the four developing nations seek to lessen their dependence on the U.S. dollar.

“Trade in national currencies will be on the agenda of BRIC leaders,” Arkady Dvorkovich, the economic adviser to Russian President Dmitry Medvedev, told reporters in Moscow today. The leaders will also discuss using special drawing rights from the International Monetary Fund for trade, he said.

Medvedev and his counterparts from the so-called BRIC nations will meet in Brasilia on April 16 for their second summit. At their first conference in the Ural Mountains city of Yekaterinburg last June, the heads of state called for emerging economies to have a greater voice in international financial institutions and for a more diversified global monetary system.

Russia, the world’s biggest energy supplier, has sought to promote regional currencies in trade and diversify its reserves, the world’s third-largest stockpile, to reduce risks posed by the dominance of the dollar. Medvedev last year questioned the dollar’s future as a reserve currency and called for a mix of regional currencies to make the world economy more stable. He said a new supranational currency could reduce vulnerability to movements in the dollar.

China is also seeking greater use of its currency to reduce reliance on the dollar after Premier Wen Jiabao said last month he is “worried” about holdings of assets denominated in the U.S currency. Beginning in July, the government allowed companies in Shanghai and four cities in the southern province of Guangdong to use yuan in cross-border trade with Hong Kong, Macau and members of the Association of Southeast Asian Nations...

*****​

This is not a joke. This is not a drill. This is the real thing ( value~8 USD):

http://wattsupwiththat.files.wordpress.com/2010/04/z100_trillion.jpg



http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=EXSZUS,EXCAUS,EXUSEU&transformation=lin,lin,lin&scale=Left,Left,Left&range=Max,Max,Max&cosd=1971-01-01,1971-01-01,1999-01-01&coed=2010-03-01,2010-03-01,2010-03-01&line_color=%230000FF,%23FF0000,%23006600&link_values=,,&mark_type=NONE,NONE,NONE&mw=4,4,4&line_style=Solid,Solid,Solid&lw=1,1,1&vintage_date=2010-04-25,2010-04-25,2010-04-25&revision_date=2010-04-25,2010-04-25,2010-04-25&mma=0,0,0&nd=,,&ost=,,&oet=,,&fml=a,a,1%2Fa