Blame the Fed!

Note the price differential.  The biggest driver of oil prices is none other than the debasing of the dollar.  So much for "price stability".

Elections, Deficits, and Debts - Addendum

It appears that the Drummond Report has confirmed my observations on the precarious state of Ontario's finances.  Drummond manages to give a rather sanitary glimpse into McGuinty's debt saturation policies of the his previous two terms.  However, Drummond does not fully delve into the long term implications of how this unsustainable debt will cripple Ontario for generations.

Demographics are against Ontario.  New immigrants are choosing the West over Toronto.  The population is aging, putting additional strains on the delivery of health care services.  Fewer children mean larger legacy education costs per child.   As I have posted before - Ontario is using the Greek strategy of using short term debt at record low rates to finance this.  

Tax increases and strategic cuts - as outlined by Drummond, will not solve the problem.  The entire model of how government services and benefits are financed and provided will need to be addressed from first principles.  Long term - defined benefit pensions need to be phased out.  Retirement ages and  employee contributions will need to be increased while benefits will need to be decreased.  Even though the Ontario Teacher's Pension Plan (OTPP) is one of the best run plans in the world - they even admitted that they will have problems paying out benefits.  The plan inadvertently outlined the issues with defined benefits when it reported that they had over 40 pensioner over the age of 100 receiving benefits - people who have received a pension longer than they have worked.  

Politicians here are willfully negligent of what is happening with the PIIGs, thinking that it won't happen here.  Sorry, it is right around the corner.

"What if..." Movies reimagined for another time & place on the Behance Network

"What if..." Movies reimagined for another time & place on the Behance Network

Elections, Debt, & Deficits

I have finally had some time to really ponder about this past Tuesday's Ontario provincial election results.  I see that Dalton McGuinty sqeaked by with a minority government, which is not really surprising from what I've read from the coverage of the election.  It was an election really about nothing, with all the parties posturing about "investments" in health care, education, etc... all jockying to claim they are the best "managers" of socialism.  Ontario Tory leader Tim Hudak ran a lackluster campaign (on a personal level, Hudak went to my alma matter at roughly the same time I did - funny thing is I don't remember him considering my political involvement on campus.  Also, the campaign manager is another long time friend from university).

Nobody addressed the elephant in the room:   Ontario is piling up debt at an alarming rate, and it's debt-to-GDP ratio is now almost 40%.  Couple this with the fact that the provincial government is running up deficits as far as the eye can see, and health care spending growing out of control and is consuming a majority of the province's finances - it is apparent that a crisis will happen.

Again - nothing to see here.   Did not hear a word from any of the leaders of how the piper will need to be paid sooner or later.  Not a word that from the left that you can't finance socialism as he who has the debt calls the shots.   Not a word about how unsustainable this reckless government spending is and how a realignment is needed of what the government should and shouldn't do with its limited fiscal resources.

 

I can understand why McGuinty isn't worried based on the government finances.  He can keep spending like a pimp with one night to live, using record low interest rates and pawn off the consequences to his successor.  Looking at the provincial debt maturity schedule, the bulk of the debt matures in the next five years.  When the inflationary spike forces rates up (this is a question of when, not if now), the provinces finances will be crippled.

So much for "leadership".

40 years ago this bubble started

Forty years ago today, Richard Nixon ended the link between the US dollar and gold. On August 14th, gold was $35/oz. Now it is almost $1,800. Rampant inflation, currency debasement, and debt saturation has all been the bastard children of this decision.

Bad omen?

Does anyone find it somewhat disturbing the frequency of ads regarding IRS and credit card debt relief, and the implication that one can shirk their obligations.

As a tax practitioner, I can say the tax debt services are a farce. Most of the reductions are removals of interest and penalties. Second, the bulk of the reasons for tax notices are people not making estimated tax payments. Most of these people spend the money and don't understand that they have to pay their income and payroll taxes first, like all salaried people. For a lot of these people, it is self inflicted.

Thought on Walter Russell Mead's "Death of the American Dream"

Walter Russell Mead of the American Interest wrote a very interesting two part post called "The Death of the American Dream" (part II, here). It discusses the upheaval that the American economy faces as it migrates to a post-Indsutrial economy in the wake of a massive, multi-generational credit bubble exploding.

Some thoughts on this came through to me:

The credit bubble will lead to a major realignment on the standard of living we are used to in many facets of our lives. Credit at all levels - government, corporate, and individual, has been growing faster than the economy since interest rates peaked in 1982. We have been borrowing against future growth in order to have consumption now. Our overall debt levels are such where we cannot grow our way out of it without either restructuring or massive inflation. This means a major overhaul of what our expectations of "the good life" is.

No longer will it be families of modest incomes driving around in BMWs and Lexues in their 4,000 square foot houses - all financed with artificially low interest rates compliments of the Federal Reserve and Asia. No longer will we have lavish entitlement programs with two plus years of unemployment benefits, lavish defined benefit pension plans and government welfare programs funded by debt.

The American Dream will be to have sufficient savings for a rainy day, levels of debt that are sustainable on one income with a margin of safety, and full contributions to the 401(k). The lucky family will be that whose house is paid off, no debts, and is maxing out their retirement contributions. As a friend of mine once said, his goal was to have his house paid off so that he would not be a slave to his job. As he put it, he could flip burgers if he wanted to and have his basic needs covered - this will be the new goal.

We will start expecting our governments to follow the discipline that we are facing. If those who work hard and play by the rules are keeping afloat, we don't want to see our tax money being pissed away on handouts and favors to politically connected constituents.

Quote of the day - IRA Analyst.

I think this sums up a lot of things going on in the economy (from Chris Whalen at the Institutional Risk Analyst):

But the more imponderable factor is the prospect of a multi-generational change in savings and housing preferences by Americans, particularly away from pulling tomorrow's puchase into today with the use of debt. The weakness in the housing market suggests that Americans are increasingly unwilling to incur debt to purchases housing, especially when valuations remain so uncertain. We are not just talking about pushing out of the market new entrants into the home owner category, but also older Americans who are trying to maximize liquidity and safety. The smaller pool of available home buyers combined with a paucity of credit available spells disaster for the real estate, building and financial sectors in 2011 and beyond. "Rent to own" is the next big opportunity for Wall Street's titans.

We will continue to see real estate decline as people are more leery of debt. We will see corporate profits decline as consumers stop front loading future consumption with debt. All this de-leveraging will create significant deflationary pressure, and all the attempts by Federal Reserve to inflate their way out will fail. It will fail because of the shift in behavior above.

Reflections on the Canadian election

These thoughts came to mind after digesting the Canadian election results:

1. The death of the Liberal party is premature. Yes, they got their asses kicked. Yes, on one level, it was sweet to witness in my lifetime. That being said, however, it would be foolish to write them off just yet. They have a long history and an established brand that still resonates with voters. They just need to get their financial house in order for the soon to be new reality that taxpayer subsidies gone with a Harper majority government. Then figure out that ideology, and not ethnic ties is what defines a party. My work in Federal campaigns in the 80's and 90s, I found that a driver in a lot of ethnic neighborhoods was that "St. Laurent/Pearson/Trudeau let me in the country, so I vote Liberal". That group twenty years later is now a shrinking portion of the electorate, and I would suspect a reason why a lot of traditional Liberal strongholds are no longer red. A new Liberal leader who can define what the party stands for can rebound from this, but it will take another election at least.
2. The rise of the NDP as the natural center-left party is premature. So they got 100 seats. 58 of them are from Quebec. Those 58 seats didn't come due to the hard work and determination of their candidates. Many of those candidates are recycled hacks, university students, professional 'activists' and the usual hippie slacker why-don't-you-get-a-real-job types. These folks know nothing about fundraising, constituent relations, how parliament works, etc. Some can't even speak French. Now you're giving these folks an $80,000/year job. Tell me how this doesn't spell disaster. This is what happened to the ADQ provincially - going from nothing to Official Opposition back to nothing; all because their MNAs were precisely as I described above, but with a right-of-center bias. Then factor in that a lot of this vote was a big Foxtrot Oscar to the other parties, and you start wondering how many of them will get re-elected in 4 years. Jack Layton can do the most amazing job on earth, but these candidates are so weak, a lot will not get elected due to their sheer ineptitude. Plus, they have to now behave like grownups, as they are now seen as the government in waiting. No more silly campaign promises that don't hold to up reality - they're at the grownup table, so they have to act like responsible stewards of the taxpayer. This is what they need to do to bury the Liberals once and for all, but based on the type of people they now have in caucus, I think they'll blow it.
3. The Tories have a unique opportunity to make lasting changes. If Harper plays the long game, I think the Tories can reverse or mitigate a lot of the problems caused by Trudeau and Pearson. It won't happen overnight (I wish!) but there is a chance to get the ball rolling. Harper can address the long term problems with health care by repealing the terrible Canada Health Act and free the provinces to experiment with more efficient and less costly mechanisms for delivering and paying for care. He can use the current fiscal problems and the electorate's embrace of austerity to shrink the size and scope of the Federal government and push more flexibility and power to the provinces.

These are just first thoughts, but I think a lot of this will flesh out over the next year.

Ditch the AMT

This article by Veronique de Rugy of the American Enterprise Institute discusses the insidious Alternative Minimum Tax (AMT) and how it going to soak more and more American Taxpayers. Originally a ploy to tax a few dozen millionaires who effectively paid no income tax (primarily because their income was inherited and primary in the form of tax-free municipal bonds), it has never been adjusted for inflation and is hitting more and more taxpayers every year.

Everyone states they wish to appeal it, but none want to forego the revenues. Solution: repeal it, along with the itemized deductions for mortgage interest and state and local taxes paid, then double the personal exemptions. That should make it flat revenue wise, plus a lot fairer to people who either rent or live in low tax states.

Plus, it would make my life easier and focus on more relevant tax planning.